Extreme Divergence- the tell-tale heart of bi-polar capital markets on the brink

To say the performance of equities in April 2012 was all over the map would be putting it mildly. Many countries in the developed world such as Spain flirted with their 2009 lows while the US market averages flirted with new multi-year highs. Divergence is now a core theme and it’s not limited to equities. A month that saw the greatest amount of stock mutual fund redemptions since April 2000 (when stocks peaked) also extended a streak of eighteen consecutive weeks of positive net inflows into bond market funds. The preponderance of US retail investors have already cast their vote in 2012 for bonds over stocks and this accounts for the first of several extreme divergences we will explore today.

This trend of retail cash leaving stocks for bonds is enormous and cannot be overstated. It’s been a panacea to the debt markets and explains the mystery of why US Treasury bond yields are so close to all-time lows while the Dow Jones is close to all-time highs.  It’s all too clear that the retail investor is still spooked about the 2008-9 financial crisis and the extended decay seen in the labor and housing markets here in the US. This is tantamount to a shift in consumer preferences that is not fickle and not likely to reverse for many years.  Once consumers are shock tested as they were in 2008, new habits die hard, even if they may not be what may be best for them.

I would argue strongly today that this secular shift in allocation is quite untimely and unfortunate for those investors. It could cause a great degree of wealth destruction if interest rates rise even a little and that’s more than a remote possibility in the coming years. This development resembles the retail herd in 1999-2000 buying internet stocks at their peak when so many lost so much.  Then they were buying illusory valuations through greed  with internet stocks and now they are buying illusory safety in US Treasuries through fear but the outcome is likely to be the same. Fear and greed should never be the basis for asset allocation but often they are.  The reality of this 3-4 year gusher of capital from stocks to bonds coming from retail investors is very telling. These investors are now buying bonds at all-time historical highs but also at a point in time that corresponds to an all-time high in global aggregate outstanding debt. Bonds may look enticing but they are just a trap at these levels.

That the ten Year US Treasury yield is now well below 2% says much about the precarious state of the global financial system. Presently the Kondratieff Winter is taking hold in a big way in much of the world but few seem to notice. Many countries in Europe are now in the throes of a full blown depression including most notably Spain and Greece. Italy ,the UK and Portugal are not too far behind. And has anyone noticed the market averages in the BRIC countries of Brazil, Russia, India and China are approaching bear market territory?  The next and final phase of the global financial meltdown has already begun as the weight of the world’s debt is now crushing the weaker economies. Despite trillions of debt monetization by the ECB yields on the weak sisters of Europe are rising and now approaching a breaking point that will test investor confidence in the entire global financial system once again. But unlike 2008, that system now has an additional $14 trillion debt piled on by fiscal and monetary stimulus that has increased the chances of a contagion. One day I suspect it will be all too evident that long standing  ignorance of economic super-cycles hurts consumers, taxpayers, investors and nearly everyone.

The last time we faced such a turning point in global finance was 1980 when inflation threatened to cripple global trade. Unlike today, Fed Chairman Paul Volcker decided to raise interest rates to rid inflation even if it would bring about a recession, which it did. Just imagine that only thirty years ago the Dow Jones was below 1000 and interest rates were over 14%. K-Wave theory holds that it’s no accident these cycles began in lockstep ever since. Bonds have actually outperformed stocks since then because they are at all-time highs today while stocks peaked in the spring of 2000. We advance the idea here that understanding these divergences today can only best be done through the lens of long wave economic analysis. Despite the recent advances in the market averages in nominal terms we hope our readers will instead choose to see the bigger picture coming from such an extended outlook.

This outlook is supported I believe by the ultra light volume in this melt-up rally that I call out to be suspect. In fact it was reported this week that now over 84% of the total volume is comprise by High Frequency Traders (robots) whose investment horizon can be measured in seconds, not years as was the case only recently. This represents yet another divergence evident in our bi-polar capital markets in that there is no real price discovery today given that overall dollar volume in trading is prohibitively higher in the global FX and debt markets. In fact corporate, junk and sovereign debt issuances are both at all-time historical highs by wide margins. This is another sign of a market top as fools rush in to chase yield no matter how risky and its twin peer was the rash of internet IPO’s in 1999-2000 that proved to be awful for most of those investors.

Other signs of a market top are evident in measures of adulation. Look no further than the pending IPO of Facebook next week to mark a peak in IPO valuations for years to come. Facebook will soon go public with the highest initial valuation in history yet they don’t produce a single product. The adulation of Facebook and Apple Computer have reached epic proportions that are not sustainable. They are both fine companies but I believe AAPL is extremely over-owned and Facebook is extremely over-hyped.

Another divergence worth mentioning relates to the certain sectors that are crucial to the intermediate and longer term direction of these markets. The first relates to old school Dow Theory that asserts that bulls markets are only confirmed when the Dow Transports join the other market averages in making new highs. This key ingredient to the bull’s elixir has been missing all along and raises concern that the rally that seems OK may not be so broad based. Also the fact that the US stock market is the only global market not experiencing a crash or a significant correction is a divergence all its own. European stock markets are breaking hard to the downside and China and Brazil have been sinking for a very long time. Still too early to make a call on a hard landing in China and the Asian tiger economies but I suspect this will happen next year.

One divergence not being discussed in the mainstream financial press is the direction of sovereign bond yield in the US and Germany versus the rest of the world. Investors have increasingly flocked to German and US debt whose yields are near all-time lows. However yields in other countries that are perceived to be weak (Spain, Italy, etc) and even some not as weak (France) have all been rising for weeks and years for that matter.  One day soon I expect investors will wake up and see the folly in buying German and US debt at these levels. The US has more total debt than anyone by a wide margin and Germany is underwriting the failed Eurozone experiment.. Yet fools rush in and push yields on these shaky credits to such low levels that guarantee a negative real return. This is the madness seen in a Kondratieff Winter.

In past blogs I have outlined my case that the endgame of this winter is more likely to take shape  through a deflationary bust triggered by rising yields more than falling asset prices. To date the fallout from rising yields has only occurred in the weakest countries but evidence is mounting that yields will rise on debt in developing economies and even on the highest sovereign credits. In recent months it has been suggested that the US can manage just fine despite most of the world being in such bad shape. To this I would call out the fact that there has been a buyer’s strike on US Treasury debt by foreigners for several months now and this trend is likely to intensify in the coming months and years. US and German debt yields have nowhere to go but higher but today these bonds are levitating at historic highs. Call it the “greater fool” theory that has been the bedrock principle underlying every ponzi scheme in history.

Another divergence screaming to be heard is the awful performance of the single most important sector of any economy- the financials. To say that the performance of the financials has diverged from the broad market averages since 2009 is quite an understatement.  Today most investors along the risk continuum have all agreed on one thing- they won’t touch financials with a ten foot pole nor will they troll for flounder.  Financials are today the modern day pariahs and lepers and for good reason. They have in spades what investors hate the most- uncertainty squared to infinity with their some $700 trillion exposure to derivatives that are still not transparent to the civilized world.  What exactly is underneath those rocks? No one dares to know and no one will know for many years the level of their true risk exposure. Discussion about the return of so-called “normalization” is just a pipe dream not likely to come to pass until a radical reformation takes place in the financial markets. Normalization of the balance sheets of the Federal Reserve and the US Treasury will require nothing less than a complete renaissance in the finest form of that term. Such a transformation is unlikely to come about by itself. It is more likely to happen through the forces of creative destruction evident in late stage economic winters.

Topping it off is the odd price behavior in Apple Computer during the past two weeks. This juggernaut may have formed a blow-off top as investor sentiment in recent months has evolved from hope to greed to euphoria to delusion. But recently AAPL tanked nearly 100 points in just days before staging a huge rally on one day last week after their earnings were announced. Yet that rally has been summarily trounced ever since and those gains were taken back in a hurry. Despite all bluster to the contrary this price action is very troubling. Such a demonstrative reversal in AAPL is quite a travesty for bulls and if this holds it would represent the pinnacle of divergence given AAPl’s undisputed role as a market leader.

Of course other meaningful divergences strut in plain sight. After the DJ transports failed miserably to confirm the broader rally in February, the Russell 2000 index of small caps retraced considerably and sold off while the S&P, DJ and Nasdaq all made new multi-year highs this spring. Bears see this as very disconcerting that transports and growth stocks sell off in such a bullish environment. What’s happening now is that so many key areas have all peaked since mid-February but since they have not done so all at once the effect is lost upon most of the market. Don’t look now, but nearly every sector, index, or star performer has recently peaked (Nasdaq, S&P, DJ Transports, Russell 2000, Oil, AAPl, etc.) but in sort of a stealth way.  Others peaked long ago (China, Europe, the US financials, most commodities etc.). The last to fall is naturally the strongest of all- the DJIA. Just a few days ago the Dow Industrials just made new multi-year highs and those headlines have the effect of cloaking the underlying weakness.  In past bull rallies in 1983, 1991, 1995-99, and even in 2003-7 we saw all sectors participate. But today it’s much different as investors sense there is something askew but can’t point to the exact cause of their anxiety. Our readers know the source of this anxiety- trillions of debt that’s accrued over this Kondratieff cycle.

Early last week a familiar recurring theme emerged again to account for some of the rally in the equities markets. It the same old “bad is good” notion that asserts that bad news is cheered because it assures massive Fed and other central bank intervention that is sure to prop up the markets. But perhaps this so-called “Bernanke put” is already fully priced into the markets.  Although corporate profits are strong from our top firms, their market caps are based today entirely on the belief that consumer demand will continue to be as strong as it has been for the past 20-30 years. Since 2011, US consumers have tapped their savings to continue the spendthrift patterns that are seemingly invincible. This pattern of US consumption is deceiving and vulnerable to radical shifts in ideology. Today US consumers account for over 70% of our GDP but like their sovereign peers consumers are in the twilight of their reckless spending that won’t be able to keep pace as it has in the past.

The present state of the US and global economies are in a state of flux to put it mildly. The election results from Greece and France today present new challenges for the EU in preventing a contagion. Confidence is the Eurozone will be sorely tested in the coming days and weeks as the backlash against austerity has been renewed and now threatens the region like never before. The debate over austerity vs. growth is extremely complex for each country as the same medicine for one may not be the same for another. It is reasonable to expect that in the short to intermediate term only one thing will come from this- uncertainty.

The global economies and capital markets today can be seen as one giant see-saw. On one side rests the massive lead weight of trillions in aggregate global debt that is coupled by a derivatives market of some $700 trillion lacking transparency. On the other side are corporate profits that are now at record highs that have pushed the US stock markets near their historic nominal highs.  But are these profits now peaking? Haven’t corporate profits been the greatest recipient of the multi-decade expansion in credit that is unsustainable? If this is so then both corporate profits and our economic infrastructure are both in peril from the excesses brought about the greatest expansion of credit in world history. I would argue that this has not been priced into current valuations. Investors instead have come to the belief that nothing could imperil the mighty US economy or its capital markets.

The last time such a sentiment was abundant was in England in the spring of 1912 when London was the undisputed epicenter of global commerce and the British pound was the reserve currency of the world.  But in just a few short years Great Britain was a shadow of its former self. First the Titanic sunk, then they were mired in WW1, and with five years New York had replaced London as the financial center of the world. This was symbolized by virtue of the massive physical shift of gold bullion from London to the Federal Reserve in NY and that event marked the changing of the guard do to speak of NY and the US as the global leaders in capitalism. NY during that period that’s not so well know to today’s investors. I find it fitting that in the month marking the 100 year anniversary of the sinking of the Titanic we must ask ourselves if our own debt levels have put the US in jeopardy of losing that crown. Keeping it will require effective leadership and a dose of humility given the fiscal cliff and debt ceiling extension looming just over the horizon.

Intro to Movie: Thrive!

This link connects our readers with a video that I think our readers will love at first glance as I did. It comes courtesy of our like-minded friends at ThriveMovement and its purpose is to expose the efforts of the negative elite who are trying in vain to exert prohibitive control over a wide range of the public spectrum. Some are sure to dissent with the conclusions of this piece and they are within their rights. But this documentary is sure to resonate with our readers and so much of the US and global population so weary and distrustful of the so-called “truth” they are told each day from the mainstream media. The two hour video seen at the link above has no peers and is “must see TV”.

We feature this piece on our home page so it would likely be viewed by so many more people and hopefully inspire more insightful discussion among people in the US and abroad about understanding the specifics of the agenda of the negative elite and how it could be overcome  through non-violent yet articulate opposition to those so misguided. Our readers will find it so cool that the founders and sponsors of this project are directly related to the exclusive bunch trying so hard to consolidate power. This author of this project has a presentation style that’s articulate yet disarming and thus more likely to be accepted at face value from skeptics given the provocative nature of this material.  The author of this venture is none other than Foster Gamble, heir to the consumer giant Procter & Gamble who took the road less traveled. We can all be glad he really lived up to his family name.

Cognitive Dissonance Alive and Well as Fed Worship proves Almighty to the Bulls

The first quarter of 2012 in now in the books and the bulls are grinning all the way to the bank. So let’s give them some credit here so long as their mantra “don’t fight the Fed” is in place. Investors are expecting and depending on full blown monetary debasement from the Fed and other central banks in the near to intermediate term during soft patches and even for not so soft periods of growth. This is now fully priced in to our markets and any hints to the contrary could rattle the herd in a minute.

What’s unfolding today I propose is not so much unlike a scenario I advanced some years ago in my monthly comments regarding the endgame of a Kondratieff Winter. In that post in 2008 I suggested this endgame would put any classic heavyweight title fight to shame. Ali-Frazier in 1971 was a classic but lasted only two hours. I have proposed for years that Bernanke vs. K Winter would redefine our standards of what is a true prize fight. It’s already a classic even now in the middle rounds one and I’m sure one day it will be regarded as the true classic bout of this gilded age. But two things must be
said now- nothing or no one in human history has ever succeeded in preventing a naturally recurring economic winter. But then again our world has never seen the likes of one Ben Bernanke, one whose demure persona belies his thirst for the jugular. He is both decisive and bold on a grand scale. But I propose the immutable forces underlying the Kondratieff Cycle are even stronger .So today the irresistible force of the K Winter meets the immoveable object in Bernanke and all the world’s a stage.

This epic match has been brewing for decades but escalated on December 28th 2011 when newly anointed ECB minister Mario Draghi dramatically reversed course and went “all-in” with full-blown QE on a scale unprecedented even in modern monetary history (this includes Ben). And recently the Bank of England, the BOJ, and even the Bank of China all followed suit in what could be described as the grandest display of monetary arrogance in galactic history. Seems to me they all saw the same script- Bernanke has gotten away with it for so long without much pain so why not cave in? Consequences? What consequences? Global bankers seem hell-bent on bluffing their way to overcome the immutable laws of global finance and credit cycles. The bottom line to me is this-
global central bankers have recently followed Bernanke’s lead and are now “all-in” like never before.  Western nations have bet the farm now that these measures will provide the so-called “escape velocity” of growth needed to overcome the enormous wall of debt that grows by millions each hour.  History says it will not work and our readers know why.

As I remarked last month, these are the salad days if you are a global central banker but the fortunes of the average citizen has not kept up with the soaring market averages. Nothing much in the world anymore and social mood is becoming more ambivalent if nothing else. How many remember that even as recent as late 2011 Merkel & Associates kept a hard line in protecting their citizens from underwriting the most egregious and inefficient welfare subsidy in the history of the Eurozone. Yet in recent days they have suddenly acquiesced to the largest ramp in inflationary policies since the 1920‘s by ceding all power to new sheriff in town Mario Draghi, a lifelong technocrat skilled in the nuances of advancing debt enslavement among large populations. How sad it is that even Germany, the last bastion still reticent to embrace such inflationary measures, has now also caved in to the incoherence of these policies. The global central bankers have pulled out their bazookas and promise to find more to tame the deflationary beast. You now have the Bank of Japan, the Bank of England, the Fed, the ECB and even the Bank of China are now “all in” with a full court press to monetary debasement to try and artificially keep asset prices from imploding further. Central Bank interference and manipulation of the markets is now at an all-time high and there is no precedent or playbook for what is needed to unwind their securities into the marketplace. Such desperation would be amusing if the unintended consequences were not so serious.

Headwinds can be seen in all directions both here and abroad. The weather over the entire country during the first quarter was among the warmest on record and surely goosed the seasonally adjusted economic data points and this strongly suggests a large giveback in Q2. One data point that gets very little attention is the inventory build that has now eclipsed the record set in 2007 that preceded the crash. Consumer spending data also shows that the binge over the past year has come largely from consumer savings as the current savings rate is a paltry 3.7%, down sharply from 4.7% just a year ago as amnesia from the 2008 crisis seems to have set in for the time being. And in the slow grind higher insiders have been selling at the fastest pace in years and this has historically preceded market peaks.

Municipalities are suffering worse than now than even during the financial crisis as the specter of pension shortfalls and the acceleration in the reduction of services to the local continues unabated.  In fact it is widely expected that soon the largest municipal bankruptcy in US history will be filed by the city of Stockton, CA. Rising gas prices seem likely to sustain and will threaten to curb consumer spending for the remainder of 2012 and beyond. The reported gains in employment make nice headlines but are still substantially understated and still remain ever so shallow as the bulk of these gains have come from low paying or temporary jobs. There’s been some bona fide improvement in this area but not nearly enough given the trillions of fiscal and monetary stimulus since 2008.

I am pleased to see improving economic conditions over the past quarter but not pleased about how these were attained. The scorecard I prefer to use to judge performance is how much aggregate debt was retired over the period. Here we are going in the wrong direction. Since the financial crisis began a few years ago there have been some patches of de-leveraging among individuals and local governments but that has been far eclipsed by the increases in global sovereign debt. The ECB’s dramatic gambit recently may have taken immediate global contagion off the table but don’t be too surprised if it reappears much sooner than most expect. Portugal and especially Spain are now the most likely areas of immediate concerns as the recent spike in their long term debt yields reflect investor unease that they can grow their way out of such a bloated fiscal mess. Unemployment in Spain is now over 20% as a whole and almost 50% for young males of working age and signs of social unrest are slowly emerging. Late last week there was a national strike and scenes of people taking to the streets looked much like Greece some time ago. One can only wonder how long Europe can keep things together given the austerity measures dictated by the Eurozone mandates. The very countries that need to debase their currencies (PIGS) to grow their way out cannot do so as long as they are part of the Eurozone and the structural maladies of the Eurozone compact are starting to show their cracks and these problems cannot be solved through more printing and monetization.

But I still believe the most likely cauldron is Greece. They will be holding elections at the end of this month or in early May and I was shocked to see recent polls indicating that the ruling two parties will get less than 40% of the votes if the vote were held today. This means that over 60% of Greek citizens want a radical departure from the terms agreed to last month that allowed the second bailout to be paid. So for these needed reforms to be implemented there must be a dramatic reversal of sentiment among Greek voters who now want to throw these bums out. If those reforms aren’t soon enacted, Greece will be forced out of the Eurozone and then the first global default of the modern era will be a reality. If this were to happen it would infuriate German and other European citizens who will come to realize they had been throwing good money down the Greece drain for the past two years. Such an event is sure to roil the markets and put contagion risk back on the table as investors begin to realize the fool’s errand of bazookas, firewalls, and an “all in” approach to subsidizing mal investment.

Accordingly, the newly issued Greek bonds coming from those who bought them in the mid 2000‘s are trading at pennies on the dollar after the 70% haircut rammed down their throats by a statist system run by our beloved elites. Schumpeter had it right- let bad ideas die and let’s advance the new generation of innovation. But today’s leaders in gov’t and finance are more concerned with preserving the very best stagecoach that can be financed from the public trough. Shakespeare had it right- Lord- what fools these mortals be! I only hope the history books our children read will not concur.

Draghi ups the ante with liquidity flood that would make Bernanke blush

Not by coincidence, global stock markets have surged since late last year as the ECB initiated the greatest flood of liquidity in the history of mankind. Since December 28th the ECB has funneled several trillions of dollars to European banks large and small in a not so transparent attempt to duplicate the efforts of our own Federal Reserve in 2008-9. By copying Bernanke’s playbook, the ECB sought to create a backdoor QE program by incentivizing those banks to buy European sovereign debt yielding much higher than the 1% freebie owed to them. So far it has alleviated the risk of immediate contagion by sending yields of Euro sovereign debt much lower but as with any central bank scheme it’s loaded with more risk than we could imagine.

In fact you could say that the last two months have represented the utopian salad days for central bankers who have doubled and tripled down on monetization on a scale no one could ever dream possible. One chart seen recently on www.zerohedge.com, (my favorite site for the technically proficient cynic) shows just how correlated since 2008 the rally in stocks has been with central bank easing and debt monetization. Since 2009 the level of global central bank debt has increased from $5 trillion to now almost $20 trillion, a level so surreal it boggles the mind and far outpaces the global wealth creation coming from the increase in global wealth attribluted to stocks. These central bankers still insist they can defeat the deflationary Kondratieff Winter by use of the same narcotic of excessive debt that was so instrumental in creating the global financial crisis still unfolding today.

For our readers who are no doubt exasperated at the seemingly perpetual post ponememt of a global credit contagion, I offer today a synopsis of a report published recently by Ray Merriman of www.mmacycles.com that chronicles what’s ahead for us in 2012 in terms of natal financial astrology charts.

Merriman 2012 Forecast Highlights

Key Geocosmic Influences impacting the markets in 2012

1)Uranus in Pluto 2012-2018  (also in 1928-34, 1963-69, ie radical change)both deliver radical change but in different ways. Pluto more determined- want it now. Uranus more detached and forward looking and optimistic Uranus = Unpredictability and sudden change with unintended consequences- always a wild ride. Pluto- has domain over debt, default,deficits and downgrades and has domain over the FED.

2) Saturn in Scorpio October 2012-June 2015- most intense period of this radical upheaval. Potential day of reckoning for the sovereign bond markets as yield soar and bonds plunge (tipping point). During the same period, Saturn conjuncts with Pluto on October 5th 2012 and lasts through 2020. Saturn has domain over accountability and responsibility and as such a large planet exerts  a very strong influence here. Tax reform takes center stage also.

3) Pluto in Capricorn (2008-2024) relates to the wrecking ball of reform minded Pluto tearing down the structures built by Capricorn which has domain over governments, laws, foundations, etc. The process began in 2008 but has a long way to go. Institutions such as the FED, the IMF,ECB, World Bank, etc are likely to be toast or structurally reformed in a significant way.  The above influences are described as “hard aspects” to each other providing the sufficient conflict needed to bring forth significant structural reforms.

4) Jupiter’s influence ends March 6, 2012 and does not return for a long time. Merriman has asserted for the past two years that Jupiter’s influence could not be understated. Each time it has come around the markets have seen huge rallies and when it left the market plunged. Jupiter has provided the fuel needed for the “animal spirits” to take hold through the grand schemes undertaken by Bernanke and his central bank peers. It has been this more than any single factor that accounts for the rally reversals of the past three years (summer 2010 QE2, November 2011 Operation Twist, etc.)

5) Uranus in Aries (2010-2018)- During this alignment the rules of the game can change at any time, just ask anyone holding Greek bonds today as they are forced to take a 70% hit yet it isn’t even classified as a default. This period will also encourage cut throat competition and excessive greed and speculation. But one good feature is that the Uranus aspect allows the potential for innovative solutions.

6) Uranus in Pluto also conjuncts Neptune and the last time this happened was the period in the early 15ht century that ushered in the Renaissance. Merriman’s take is that we are also now ushering in a new renaissance that began in the 1990’s that will last 100-150 years that will usher in transformative changes that even exceed the Italian Renaissance some 500 years ago.

7) Neptune in Pisces 2012-2026- Neptune rules spirituality and provides a sanctum for anyone who chooses to tune out the negative drama unfolding all over the world during these wild and erratic times we are living in. It will only get more erratic, and changes will come even faster. Many will choose to get caught up in the drama and could well greatly suffer from fear and despair. Others will find solace in their ability to tune out the noise and choose not to participate in the drama in what will be for them a parallel reality.

Implications for the Capital Markets for 2012

Given the geo-cosmic influences described above, Ray Merriman has offered these themes below as ones most likely to take place:

1)Even though Jupiter leaves March 6th Merriman feels the rally could continue possibly until June 2012 well after Jupiter is gone. His call is based on historical price charts showing that during the last two major depressions (1873 and 1932) the markets plunged a few months after Jupiter left. The farthest out he sees this going is November 2012. Bottom line is this- June 2012 and October-November 2012 are very bearish periods for the markets with a strong possibility that debt contagion could be triggered during these periods.

2)Gold and Silver will continue to rally throughout 2012 and beyond as there is clearly no simple or expedient solution to the global multi-trillion debt crisis. Key support on the Dow Jones Industrial average is 10,404. If that is breached it is likely the beginning of a nasty bear market.

3) Federal Reserve will be even more scrutinized as more people discover the truth about their negative attributes. Merriman asserts that Pluto in Capricorn exposes the Fed’s power, coercion, and acts of manipulation at the expense of others.  Could Ron Paul’s supporters get their wish to end the Fed? Perhaps, but not likely says Merriman because the alternative is too nauseating to contemplate- allowing our politicians to take control of the printing press. A more likely long term solution is a radical structural reform of the Fed’s powers and dual mandate resulting in a new institution that is but a shadow of its former self. Yeah, I like the sound of that.

4) US Dollar- In a bull uptrend for several years, approaching 90 on the USD index.

5) Oil- rising possibly to over $150 again in the spring before plunging again dramatically as it did in 2008 when speculators juiced it on a parabolic move in just weeks. Barring WW3 oil should track stocks and other paper assets juiced higher through relentless central bank easing.

6)  Tranferrence of world power and subsequent new currency- when the next global contagion takes hold, it could transform the global financial system like never before. The present system predicated on rolling over exponentially rising debt to fuel consumption is unsustainable and the ability for a multitude of sovereign nations- including the US- to repay their debts doesn’t pass the smell test. So what will give? Merriman suggests there is only one practical solution- a global debt jubilee that wipes out trillions of IOU’s but also rebalances to a degree power in the world. The geo-cosmic alignments unfolding before us in 2012 indicate that very large forces will be squared against one another and it’s anyone’s guess as to how it will play out. But it’s important now to frame for everyone the battle now brewing but soon to come to the fore. The first is the hemispheric shift of power from West to East. Asian and BRIC nations hold most of the global reserves in the world while having little debt. They are producers and savers and their time has now come. Western economies have been living beyond their means for decades and are indebted to these Asian and BRIC nations and in the coming years these geo-cosmic alignments provide the foundation for truly dramatic and transformational change. Some form of debt forgiveness from Asian creditors must be forged for global trade and finance to flourish.

The other re-balancing needed and provided for during these geo-cosmic changes is the relationship between the Fed and the US Treasury. Since 2007 the Fed has bought trillions of US Treasury debt because no one else would and in effect they are out there on a limb. The Fed will be hard pressed to sell the bulk of their US Treasuries nor the trillions in US mortgage securities they hold. And the US Treasury could be come unable one day to pay the interest to the Fed and others if interest rates rise appreciably in the coming year, and they likely will.  Merriman said that the prevailing geo-cosmic influences in the coming years can help facilitate  a global debt jubilee whereby the US Treasury debt is marked down by the Fed in a huge haircut. Of course it’s not that easy. The elite banksters and owners of the private Federal Reserve Bank would have to agree to take massive losses in a global jubilee of debt forgiveness and that’s the rub. But there may be no other choice plain and simple. In the end, these enormous debt loads just can’t be paid. So will US citizens be enslaved for the next two generations or will the banksters eat the losses? Something will have to give and there will be winners and losers.  Such a proposition is but just a glimpse of what’s ahead in this fourth Kondratieff Winter of the modern industrialized era.

Where’s the Jubilee?

Since late fall global stock markets have managed to rally to multi-year highs despite global debt levels that continue to increase to all-time highs. Kondratieff theory holds that such excessive debt must be removed from corporate, individual and most of all sovereign balance sheets sooner or later. But since the global financial crisis began in earnest in 2007 central bankers have effectively delayed this process of debt retirement through the most ingenious and outrageous financial alchemy the world has ever seen.  If you took a poll today, most would say these central bankers have averted a deflationary collapse that could have been seen as a full-blown Kondratieff Winter.

It is still possible to avert such a global deflationary meltdown but only if world leaders and central bankers could coordinate some form of a global jubilee on a grand scale. It’s by far the best solution to this dilemma that grows worse each day, each quarter, each year. Aggregate global debt obligations today exceed $100 trillion nominally and are so large they cannot be serviced by the output of those now so indebted and thus many countries are susceptible to the detriment of even marginally higher interest rates that could make repayment of their obligations impossible. An ideal example is Greece and Portugal, two countries that have virtually no exports that have been dependent upon government spending for a high portion of their GDP. They are the two countries most likely to default, and in fact Greece has already defaulted except as a technical matter.

Sadly, European leaders just don’t grasp super-cycle dynamics; for if they did they would know that imposing brutal austerity upon a people will not allow them to pay their debts. Surely, there must be some form of control imposed upon these distressed nations but not the type that will impede growth or their spirit of renewal. This must be encouraged, not discouraged as the austerity measures would do. Bondholders must take a bigger hit and take their medicine and learn a painful lesson themselves. But will they? That’s the big question and since the Greek bailout must be agreed to soon to avert the $19 billion coming due next month, world leaders and creditors better soon begin to embrace the jubilee concept or risk possible global contagion. The aggregate debt is just too big and we all know it.

Ironically, a settlement of the present Greek restructuring with a more robust haircut to the bondholders could sow the first seeds of the next spring cycle phase of the K-Wave. That is my hope, because no one wants to see the worst side of a Kondratieff Winter, not even those who are short the market. What is needed here is a coordinated jubilee among many classes of debt instruments  (most notably sovereign debt of western nations including the US) that would give clarity and confidence going forward to all market participants- investors, entrepreneurs, workers, corporate management, and others so that the next growth phase of the cycle can begin in earnest with a firm foundation. Kondratieff theory holds that this is impossible without the removal of excessive debt.  The sluggish growth seen in recent years that has occurred despite trillions in fiscal and monetary stimulus is the best evidence of all that more debt is not the answer.

The current market averages do not account for these excesses to be removed anytime soon. They assume central bankers will be able to pull the levers needed to prevent a recession or worse. Recently Chairman Bernanke asserted that the Fed would keep rates at near zero through 2014. I found this as surreal and it smacked to me of desperation considering that Bernanke’s term as Fed chief will end well before then. Has “Fed worship” become so acute that we actually believe such nonsense?  In recent weeks a new euphoria has set in with the prospects of less worse unemployment and the looming IPO of Facebook. It’s great that some things are getting better but I wonder if anyone is giving serious consideration to this jubilee notion. I suspect however this matter will soon come to the fore and accordingly I have added some fresh material on this in the Jubilee section of our site. I encourage our readers to check this out and the works of David Knox Barker that can be seen at www.longwavedynamics.com.  The jubilee concept called for in the book of Leviticus squares very nicely with the core theme of Kondratieff cycle, which has been around longer than we can imagine.

2011 Recap and a Primer for the Inflection Point of the K-Winter in 2012

“Check, please!”

The much anticipated Santa Claus rally in the days leading up to Christmas finally came and propelled the US averages to the same levels at this time last year. It seems like we have been running in place for years now and are now thoroughly exhausted. In fact, investors have little to show in the past year and much less over the past decade.  There is a perfect explanation for this- the Kondratieff Winter that began in early 2000 and stocks historically perform awfully during this period.

The US averages are down around 15% on a nominal basis since 2000 and adjusted for inflation the major averages are down almost 40% since then and this pathetic performance has occurred with shockingly low volumes that belie any meaningful rallies of yesteryear. Efforts from Washington as well as the Federal Reserve that can be described as both unprecedented and truly gigantic in scope yet they have failed miserably to stem the deflationary tide. Debt levels among governments, corporations and individuals are now at all-time records by several standard deviations even after three plus years into this de-levering process brought about from the global financial crisis. In this year 2011, we saw new low water marks brought about by the K-Winter- the first ever downgrade of the US AAA credit rating, European sovereign debt being issued above the unsustainable 7% level, and a failed German bond auction among others. Have no illusions- we are now deep, deep into this fourth Kondratieff Winter of the modern industrialized era. So now what?  I suspect it’s time for the “check, please”. The tab must be paid for much of the excesses of recent decades and the invoice has been sent.

As the saying goes, it’s time to pay the piper. It’s happening all over the world now with one notable exception- the US. It’s only because we hold the world’s reserve currency and have the most liquid market to be found anywhere in the world- the US Treasury market. Since our cost of capital remains low, we haven’t been forced into the austerity seen in Europe and other over-levered nations in the Western world but I suspect that condition will change in 2012. It’s really remarkable that the US stock market averages were flat for 2011 when you consider that China was down around 20% (and is now four years plus removed from their peak in 2007), Europe as a whole was down over 35% and essentially no country I can recall had a positive year in performance. Hence, US dollar hegemony impacts the US markets.

My outlook for 2012 for the markets is abundantly weak. I expect stocks to perform the worst, especially US stocks which have remained resilient to date and are thus more overpriced for this winter period. I expect bonds to rally and remain stable for a time but at some point I feel that the bubble in US Treasuries will soon burst, and when it does look out below. US Treasuries are the single most over-owned security in world history today and the risk-reward for them gets worse by the day. Although I have expected the worst period of the K-Winter to happen sooner, there are many reasons why I feel it’s closer than ever. So I will now review the various reasons supporting this and attempt to articulate the case to our readers.

When I launched this site in early October 2007 just days before the all-time nominal highs in the market averages, the content relied on the core of Kondratieff Wave theory and the insights provided by Robert Prechter, the world’s most esteemed practitioner of the Elliott Wave theory. As the crisis deepened in 2008 and into 2009 I was sure this was “the big one”. It felt right and the magnitude of the unfolding crisis was sufficiently awesome in scope. But in 2009, two things happened that altered my view in the short term. The first was the sheer scale and breadth of the bailouts coming from Washington and other was the financial alchemy coming from the Federal Reserve. I wasn’t sure either would get such a mandate but they did pull it off. It could have only happened if the US Congress and the American people suborned such grandiose efforts to stem the winter. They did, and by allowing such carte blanche they helped prevent a complete meltdown but perhaps unwittingly made things worse down the road. We now have several trillions more in debt today than March of 2009 yet we are no closer to meaningful improvements in economic growth and jobs or in rectifying the core problem of the Kondratieff Winter- trillions of excessive debt that is in jeopardy of default.

The second surprise to me was the EW Theorist report put out in late February 2009 by Robert Prechter. As a subscriber, I was expecting to see more confirmation at that time that the markets were set to go deeper in the abyss. But instead, his message was the complete opposite- cover all shorts and get long in a hurry. This rally he said would be longer and go farther than anyone could imagine and it sure did. It bottomed days later in early March and the subsequent rally actually went longer and farther than his own forecast. This can be directly attributable to, among other measures, Chairman Bernanke’s QE2 program that was announced in late summer of 2010 when it seemed the US economy was about to fall off a cliff. So in the spring of 2009 I took a step back and acknowledged it was perfectly acceptable within the parameters of K-Wave theory to allow for a very strong bear market rally in the interim.

However as someone so attuned to the Kondratieff Winter my natural inclinations were biased in believing the deflationary bust would occur sooner than later and in the spring of 2010 I was bearish (as was Prechter) and as it turned out we were both a bit early.   But around this same time in the spring of 2010 I did discover another source of material that I found could be used to complement the K-Wave and Elliott Wave theories in projecting better when the real winter would take shape. It came in the form of the financial astrology of Ray Merriman at www.mmacycles.com. He provides daily and weekly analysis with paid subscriptions each Friday also provides a free update on his forecast for the coming week that is based on natal astrology. Eureka!  This was the missing link I had been seeking all along and I began incorporating his findings into each blog I wrote each month. Meriman’s work makes it easy for us to understand the nature of financial astrology and its relevance to market cycle forces. Its relevance may surprise or perhaps stun even the most liberal and open-minded of us who seek alternative sources of knowledge in the capital markets. Today though, it could be seen as gem in the dark seeking the light of day because it never discussed by the mainstream financial press.

Here is a prime example of the manifestation of my evolution in becoming a true believer in this.  In the spring of 2010 I expected that the so called bear rally from early March 2009 was long in the tooth and saw the US economy deteriorating so I was inclined to short the market. The “flash crash” in May of 2010 was the final kicker and convinced me we may be on the verge of a meltdown. But Ray Merriman had warned that a major astrological configuration was upcoming (Jupiter) and that this influence would be powerful and bring forth the animal spirits in the markets. Just as the markets appeared poised to capitulate in late August 2010 (foreshadowed by the so-called “death cross” in the charts) they reversed course and whipsawed higher once Bernanke announced QE2 in late August. To my chagrin, Merriman’s forecast was spot on and he rest is history- I was born again.

I was wrong to believe Bernanke lacked the will to enact such a blatant act befitting a Ponzi scheme but he did and the bottom line was that I misread the tea leaves in failing to see that the prevailing conditions coming from above would permit such a bold move at that time.  Financial astrology serves to make sense of the maddening incoherence germane to the US stock market. Financial astrology to me seems a bit like a cheat sheet- simply ignore the headlines and just look for the conditions set for from the stars that influence human behavior. After the whipsaw following Jackson Hole in 2010 I realized the need to give this new source its due and I began to report Merriman’s themes and forecasts to my growing audience. I want more people to consider for themselves the relevance of this discipline and see for themselves how insightful it can be as a tool for guidance in the markets. We all know how truly maddening it can be trade the US market over the past few years and even the most seasoned and attuned money managers have been getting slaughtered. So I hope the concept of financial astrology gets more attention in the coming years as a credible tool for managing portfolios. Today it is the domain of a very tiny subset of traders and fund managers but I suspect it will grow measurably in acceptance over the coming years.

Lets’ recount another example of financial astrology in actions at its best. Recently in the summer of 2011 I was set to go “all-in” again shorting the market after the S&P downgrade over the summer. Just like the spring of 2010 it looked right to me. Merriman has warned too before that the Jupiter influence vanished in the spring of 2011 and the markets peaked then in late March. His forecast made it clear the markets would tank in the spring and summer of 2011 but get this- he warned over the summer in the midst of the biggest full-blown “risk off” period we had seen since the 2008-9 crisis- that good ol’ Jupiter was coming back as a major influence in November 2011 and this conjunction would last into early 2012.  In the past, the events of late July and August would have validated my own convictions that this decline was “the big one”. But since I had learned before from this methodology of financial astrology that the influences from the heavens trump the headlines, I bit my tongue and held back and refrained from shorting the market and reflected this development in my monthly blog here. Sure enough, the markets plunged just over 20% into bear market territory and then shorts were taken to the woodshed yet again as the markets reversed higher just as the Jupiter influence returned. So note to self- don’t invade Vietnam and don’t short the market during any Jupiter conjunction. Merriman was right and for the first time in two years I didn’t get burned on the reversal higher.  Merriman had proved to me that the answers for why this period was not destined to be the final capitulation were rooted to some degree in this strange but true discipline of natal financial astrology. When I researched the archive of weekly forecasts on his site going back to 2008 I was amazed at how well he had framed the juxtaposition of the markets in terms of what he calculated from the astrology above. And we are talking about some crucial periods here where he had to square the circle or if not anyone could dismiss this as heresy.  Some may chuckle here at significance of financial astrology but I would just say to those to check out his forecasts for themselves. Their accuracy is just fantastic and almost a bit spooky. I just wish I had found him sooner because I could have saved myself a bit of aggravation.

So what is Merriman’s call for 2012? The end of Jupiter (rally) and the onset of increasing influence of two extremely significant astrological conjunctions. The first one is the influence of Pluto and Uranus and the next is the adjunct of Pluto in Capricorn.  Pluto rules debt and removing from our world things that have proven to be oppressive to people. Capricorn represents all the impeding structures in our world that have been erected but do not serve the masses as they should. Institutions such as the IMF, the Fed and other central banks, the UN, etc would all fall into this group. Pluto in Capricorn actually began in 2007 with the Cardinal Cross alignment and lasts through 2015. Pluto also aligns with Uranus which represents upheaval, reversal, and unpredictability in general. Given that these are the primary influences from above for the next few years it is not a stretch to believe that the 2012-2015 period will be unlike any other we or our ancestors have ever seen in terms of radical and meaningful change all over the world.

So the bottom line of what I propose is this: all three of the disciplines I have studied and reported on here all suggest that the worst elements of the current Kondratieff Winter are set to unfold in the near term and the effects will be swift and possibly brutal. By their nature, two of these disciplines- the K-Wave and the Elliott Wave- are poor tools for near term market forecast because each cannot accurately predict in the short term the effects of human free will upon the larger model.

The K-Wave theory holds that the excesses built up over the present K-Wave cycle must be removed through large deflationary defaults but cannot forecast the exact timing of this event. Likewise, the Elliott Wave cannot always be used as a reliable indicator for the short term direction of the markets because the waves making up the primary count can be extended out through human decisions that can serve to delay the inevitable outcome. The best example of this is the QE2 program launched in the fall of 2010. In both of these the larger picture was very clear but the one in the near term not so much. But also there are true limits to the extent that the wave count in Elliott Wave theory can extend and likewise there are limits to how long the Kondratieff Winter can be forestalled because the weight of the excessive debt gets larger the longer it is extended. In any case, those who follow both of these generally expect the bottom to fall out pretty soon.

However, now for the first time the natal financial astrology promulgated by Ray Merriman suggests that the real inflection point for this economic winter is now very close at hand and he expects 2012 to be one of the worst years ever for the capital markets. What is worth noting here is the Merriman forecasts have resisted calling for a primary degree plunge since 2009 and thus his readers haven’t been exposed to the false alarms coming from EW and KW followers. Many of these have become disillusioned with Elliot Wave theory or the K-Wave theory because the US markets have to date stubbornly refused to cooperate. My take is this- the K-Wave has proven to be very accurate in reflecting the underlying conditions around the world for the past decade and to a lesser extent the Elliott Wave has been good in framing the big picture but since the Feb 2009 call has been poor in the short term. I believe once the market plunge begins in earnest both will be seen in a better light by their followers and doubters too.

What may kick off this inflection point in 2012 sending the markets much lower? The list is too long to recall here but I believe there are several critical factors that rise to the top of the list. These would include: credit  ratings downgrades for many AAA rated European sovereign nations (most notably France), soaring bond yields in Italy, Spain and other major European sovereigns, protectionism and global trade wars, a spike in US long term interest rates as investors demand more yield for the risk, the perception of lasting political incompetence in the US and Europe in dealing with the K-Winter, a hard landing in China marked by an enormous property bubble and a growing sense of unease by investors and consumers who lose confidence in the economy and the capital markets. I will be watching the yields on long term Italian debt carefully because I suspect this is the market most likely to roil the global capital markets at some point in 2012. It fits with my belief that a rising yield deflationary collapse is on the horizon that may confound investors and pundits for years.

I relate our markets today to the period after the first sub-prime defaults occurred at Bear Stearns in the spring of 2007. The housing market had clearly peaked and anyone could see the makings of an enormous bubble yet the markets actually made all-time nominal highs later that year in October. Today, the bubble I see isn’t limited to one market- it’s the sum total of all the debt out there which many have estimated exceeds $120 trillion excluding several hundred trillion in outstanding derivatives. K-Wave theory holds that markets will not hold up in the face of such daunting levels. And now for the first time, the stars agree.

Note to our readers: On November 3rd I felt compelled to devote the entire monthly comments to introducing to our readers the works of one David Knox Barker, the author of www.longwavedynamics.com. This is one smart dude.  Over the holidays I finished his latest book titled Jubilee on Wall Street and found it to be among the finest books I have ever read. In fact, I now regard him as the world’s top authority on long wave cycles and the Kondratieff Wave theory in particular. So next month I will be posting a comprehensive account here recounting his core themes and outlook for the remaining winter period and even more on the Kondratieff Spring period not far off. I urge our readers to strongly consider buying this book and please feel free to send us your comments. Barker has a technical mastery of the subject matter that far exceeds anything I’ve seen to date and his core theme on the K-Wave is unique in that it is parallel to the one we have advanced here- that we should be focusing more today on the next cycle phase- the Kondratieff Spring- and the wonders it will bring.

Ponzi Scheme in Peril: Bond Vigilantes up the Ante on Sovereign Debt

Look no further than the recent buyer’s strike of German bonds to see that this economic winter has entered a new stage.  On Wednesday there were just no takers for nearly 40% of the bonds offered by the most creditworthy country in Europe so the Bundesbank had to step in to fill the gap and monetize their own debt. This bond auction was nothing less than a spectacular failure, the first I can ever recall in a major economy. The implications for this failure are daunting to say the least. Trillions of sovereign debt worldwide is coming due soon and must be rolled over but private investors have just sent us the first glimpse they just may pass. This may be the first chink in the armor of the global debt markets that now cannot take for granted that their future auctions will be fully subscribed unless higher rates are offered.

What has unfolded in the past few weeks strongly supports the case we have advanced here of a rising yield deflationary bubble. The prevailing thought has been that yields on all global debt would remain low in periods of low inflation and low growth such as the past few years. We have argued that we have been undergoing more deflation through a stealth form and that soon a tipping point would be reached when investors would demand much, much higher yields on toxic debt than the market was demanding then. Central Banks can declare low rates for however long they want but ultimately the market prevails in determining the level of rates. If nothing else, one thing is certain- interest rates are going higher for many years, like it or not.

Until recently the chase for yield had allowed investors to step out farther on the risk curve but now it’s like the song goes-  “the times- they are a changing.”
In fact we just saw this month the first major victim in the chase for yield in the sudden bankruptcy of MF Global, a major commodities brokerage in Chicago run by former NJ governor John Corzine. His leveraged bet on high yield sovereign debt imploded almost overnight and the fallout is still reverberating throughout the markets. Many are comparing this event to the implosion of Bear Stearns in 2008 that preceded the market crash months later. Much like then it was taken on faith that the housing market would rise forever but certain assumptions that have worked for years just can’t be taken for granted anymore. The one now being questioned- that investors will settle for puny yields on government issued debt- is one we have questioned here for some time. When sentiment on such core themes reverse, the fallout can be swift and brutal.

In 2008 stock markets crashed when liquidity evaporated in the credit markets as it became clear that commercial and investment banks had insufficient capital to cover their risky bets on housing. Since then a great deal of toxic private debt has shifted to the public sector as US and foreign central banks and governments absorbed much of that toxic paper. And since they have dramatically increased their holdings of this toxic paper in the years since 2008 they now collectively hold tens of trillions of these assets. Yet until recently investors didn’t seem to care. It’s amazing to think that until just recently European sovereign debt traded in fantasy land but now this debt is beginning to be priced more in line with the bitter reality. Plain and simple, investors have mis-priced risk in these markets for some time now and it’s all coming come to roost. As we have said before- a ponzi scheme works perfectly until one day it doesn’t. That it did work for so long was no reflection on it’s sustainability.

At present stock markets all around the globe are in bear market territory save one- the US. Even China has under-performed for more than a year despite having unprecedented global reserves in the modern era. Sadly the prospect of global debt contagion is upon us again, occupying more copy in the press than even the most radical protest movements could ever muster. But such is the fate of the fait accompli of the Occupy Wall Street effort- a  twisted tale long on passion but short on direction. Much the same could be said today for efforts to tame the massive global debt loads we have been blowing our horn about for so long that are the mother’s milk of any Kondratieff Winter.

Want more signs that the 60 year super-cycle in credit is close to implosion? Look no further than the blow-out spreads on the credit default swaps of sovereign Euro debt such as Spain, Italy and now even France too. Amazingly, US sovereign debt markets have coasted throughout the Euro crisis because we are still considered the best safe harbor in the world to park capital in times of crisis. This is still the case in part due to our role as the undisputed global leader in capital formation and profits but it can also be attributed in large part to the enormous benefit we still enjoy as the country with the lowest cost of capital in the world by a mile. This endures however only so long as US dollar hegemony remains the law of the land, i.e. the  USD as the global reserve currency.

This hegemony is now under more pressure than ever as emerging giants such as China and others have gained new thresholds in the form of foreign currency capital reserves that are today the highest in recorded history among major powers outside the US. Nonetheless, I believe the USD will remain the reserve currency by default for many years until a new global standard is implemented. Until then, the US is likely to retain the benefits of of a low cost of capital relative to other nations but we are still not immune to higher rates too. I expect in 2012 we will see ever higher rates paid for US Treasury debt when investors begin to demand to be paid more for the risk of owning our bonds. Our national debt last week eclipsed $15 trillion and our debt to GDP is approaching 100%, a level seen as problematic to investors.

Given the severe problems in Europe, the US is also likely to suffer more than most from the global economic contraction brought about by the excessive debt loads throughout the world. Our export markets are suffering and our global giants who depend so much on global growth will also suffer. Looking back years from now 2011 S&P profits approaching the $100 level may prove to be a peak level for the cycle because of the limitations inherent with record global debt. Austerity will be a core theme for several years as nations, corporations and individuals continue to de-lever. It will become all too clear soon that so much of our perceived prosperity came through debt induced growth at the margin that could not be sustained. The hallmark trait of the winter phase of the Kondratieff Cycle is marked by this process of removing the excesses and mal-investment that have endured for so long.

What can we do now to mitigate the worst effects of this painful process? Above all I think is to get a renewed sense of cooperation among our elected officials in Washington. At stake here is nothing less than the full faith and confidence of our capital markets, most notably our Treasury market. We need a grand bargain now more than we know because without a road map directing several trillions in spending cuts for the next 4-6 years we risk undermining our own prosperity in the form of higher interest rates that will gobble up a much higher percentage of our Treasury receipts. Because the vast majority of the US national debt is short term this condition could easily morph into a vicious cycle that can perpetuate itself if it reaches a critical mass.

Each day the status quo remains the same we approach a point where reversing the trend will become too difficult. We can give thanks now that the US is a flight to safety for so much foreign capital but we cant take this for granted. I hope we see a renewed fight in Congress to begin anew the process abandoned by the so-called Super-Committee that was an abject failure. I hold out hope that a group of strong-willed junior representatives can muster support for a Grand Bargain to get us going again. With a vacuum of leadership all throughout the world the stage is set for those who have the conviction to make a difference, and the sooner the better.

The Perfect Storm in a Kondratieff Long Wave Winter

This comes to us from our friends at one of my favorites sites for progressive financial reporting- www.seekingalpha.com. It was written by David Knox Barker of www.longwavedynamics.com, another great source for Kondratieff Wave  analysis. The core theme of this piece squares nicely with the material advanced on here on our site and provides a reasonable snapshot of the present conditions in the capital markets against the framework of the larger economic cycles.

Of particular interest to me is the chart shown on the final page. It shows the trajectory of interest rates in the US from the beginning of the current fourth Kondratieff cycle (1949-2015) as we have advanced throughout the material here.

The image of this chart on rates is hard to ignore- a near perfect pyramid showing rates rising from the bottom at the beginning of the KW cycle as defined by the K-Wave theory in the early 1950’s and peaking thirty years later in the early 1980’s and then sinking to near zero at the end of the cycle in recent years.

The symmetry within the pyramid chart of interest rates is striking. Notice that that the peak in rates occurs precisely at the half-way point (1981-82) of the K-Wave cycle. This coincides with the period when hard assets (gold, oil, etc) peaked and ushered in the era of outsized gains (understatement) for paper assets from 1981-82 until recent years. It is clear even at first glance of this pyramid chart that a major transformation occurred in this crucial period in the early 1980’s and it coincides with the transformation to the 3rd stage of the K-Wave cycle- summer. We have already established in our content here that the summer season of the K-Wave began during this period of the early 1980’s but we had lacked a chart directly linking interest rates to the K-Wave cycle. This chart reveals a crucial missing link supporting the seasonal theme of the K-Wave theory that is confirmed through interest rates as seen in their natural cycles.

These economic seasons are naturally recurring patterns endowed with nature’s harmonic ratios that are a part of the natural order before us and to that end I have recently added some material in our Esoteric section from Rick Santelli at CNBC that supports this further through sacred geometry. I encourage our readers to  read this and examine these charts and make your own conclusions. They suggest to me one core theme- interest rates are at or near lows for a long, long time. Moreover, the implications from this pyramid chart strongly reinforces the idea I have advanced in recent months- a rising yield deflationary collapse of paper assets that may baffle the experts.

Never mind the prevailing presumption today that rates will be kept low so long as the Fed can help it. We beg to differ. The charts beg to differ. Remember that “Operation Twist” from the Fed has floundered in lowering long term interest rates because global central banks and the primary dealers of the US Treasury are all too willing to sell their toxic paper back to the mother of all suckers-  the Federal Reserve. Remember the Fed dumped gold under $300 for a decade and begin buying it back over $1000 when they finally realize they’ve lost control of a once tight market. Now they are buying the most toxic assets on Earth- long term US debt sure to be devalued if not first defaulted.

Just look at the recent data being reported from the US Treasury. The reality is inescapable here- the foreign component at these Treasury debt auctions has been waning for months and they are now net sellers of US debt. That is to me a megatrend game-changer that may not baked into the current all-time low yields.

In the near term we may continue to see yields on US government debt creep lower when fears mount over systemic risk in the European banking system, but I suspect at some point soon yields will reverse higher in the US in paradox when investors realize that bonds are also paper assets that are prone to lose value during a Kondratieff Winter.

Must Read! The Perfect Storm In A Kondratieff Long Wave Winter

European Showdown Looms Large

It’s all come down to this- either the Eurozone leaders will soon go “all-in” to help Greece, Dexia, Spain and Italy or they won’t. A key vote is upcoming that could establish a special purpose vehicle (EFSF) to recapitalize Europe’s weakest banks. It appears now it will pass after and they are likely to  triple down on more commitments in hopes of preventing the contagion from exploding further. Never mind the riots in Greece or the growing unrest of working Germans who are footing the bill. The will of the people in Europe remains subjugated to the elites and the bankers for now but I expect that to change in 2012. So how would a European TARP style bailout of their banking system figure in our looming Kondratieff Winter?

I suspect it could push out the final act into the early months of 2012 but not much farther. Let’s face it- the central banks of the western world are tapped out and looking more impotent each day. Several years of fancy and risky maneuvers  (QE2, Operation Twist,TARP, EFSF, QE1, etc) have been promulgated yet they still have not increased global growth sufficiently. Instead these programs have left us with trillions more in debt obligations that must be reconciled. I look for the brunt of this to occur in 2012 and beyond.

But nonetheless today the US is technically not in a recession and earnings are still relatively strong, so there’s no reason to believe the bulls can’t make one last charge higher into 2012. The fourth quarter has historically been one of the strongest periods for stock gains even during this present Kondratieff Winter. After testing support twice at 1070 on the S&P it appears that support has held and I think we could see a multi-week advance in stocks so long as there is no formal default in Europe.

The primary counts from the Elliott Wave model and the financial astrology of Ray Merriman (mmacycles.com) also support this forecast. EW charts I’ve seen reflect a ending diagonal pattern that would suggest higher prices ahead for stocks given the resilience of the past week in the face of near doomsday mindset of investors. Likewise Merriman’s financial astrology indicates the looming influence of Jupiter across our heavens beginning soon will provide the ideal backdrop for excess speculation in the markets to take the averages higher. Once again much like the period of June 2009-March 2011 where Jupiter’s influence was cresting and clearly caused significant undue speculation that did impact our markets to the upside.

Don’t laugh folks, this stuff in all too real. But let’s also remember that the primary count for Merriman, the EW, and with our K-Wave theory that still holds that 2012-1015 will be quite brutal for the capital markets. In EW terms, the P3 (Primary Wave 3) down is the big one and it’s been brewing now for some time.  In financial astrology terms, the period from 2012-2015 represents the tail end of the Cardinal Climax, the most significant geo-cosmic signature ever seen on the modern western world whose primary feature is a conjunction of Pluto in Capricorn representing the destruction of anything constructed in the material world that’s not good most humans and chief among these is debt.

Yet still the hallmarks of a Kondratieff Winter continue to play out before us each day. China now seems vulnerable to a hard landing, a fate that would have severe implications for global growth even in the absence of any trade wars over currency manipulation. Home prices and consumer sentiment continue to plunge  and the Occupy Wall Street protests seen in recent days and weeks make you think we are back in the 1960’s again. But this exploding civil protest is a natural feature of any Kondratieff Winter and it stands to reason we will see more of these everywhere.  Social unrest also plays a primary part in the forecast of Elliott Wave theory which holds that capital markets are more influenced by waves of social mood than profits. It’s been hard for stock markets to sustain their gains for too long when the balance of wealth within its population becomes so distorted and outlook of the people is as unsure as it is today. History has shown this precept to be accurate to a primary degree yet few take heed of such non-material inputs in their market forecasting models. I do.

Now back to the tempest in the teapot- the European financial crisis now in its fourth year and literally on the brink as its banking system is on the verge of collapse. The solution now being advanced is to create a special purpose vehicle to recapitalize European banks with 8 to 1 leverage to be sufficiently large to prevent a run on the banks. This plan smacks of insanity but is par for the course now with sovereign debt in the modern age. However its what the markets have been demanding so naturally they just may get what they want- for now.

Whatever, I believe very strongly the citizens of Europe are poorly served  by these new accords that continue to pile on more debt. Under this approach the creditors are demanding austere measures sure to cripple the economies of the debtor nations. Yet history has shown us many times that if a single country (Brazil, Argentenia, etc) can devalue their currency they can export their goods more competitively and come back stronger than ever. Who would have thought for example as recently as 2000 that Brazil would emerge as one of the strongest nations in the world after such a checkered history of defaults and devaluations of their currency? Currency devaluation can help so long as every nation on Earth doesn’t do it all at once.

Last month even Switzerland, the final bastion of hard currency (other than Norway) finally relented and devalued their own Swiss Franc due to the effects of over appreciation of their currency had upon their own economy. Such a move was unprecedented and soon caused a scandal at UBS when a rogue trader bet too heavily on the omniscient trajectory of the Swiss France. And much like the US housing market a few years earlier it proved to be awful to bet on a market going up forever. Yet those bets were still placed anyway.

It is all too clear that  subsidizing private profits at the expense of socialized loss (taxpayers) needs to be abolished in every form in every country by everyone. Yet under this approach one party does indeed lose- the speculative bankers that lent the money. They have been protected all along by the leaders ever since the global financial crisis began in 2007 yet we are now seeing the first signs that the ice is beginning to finally crack under their feet. So look for the haircuts to the European banks in the looming Euro settlement to approach 50% instead of the 20% agreed by all parties three months ago in mid-July. The world has changed too much since then and the piper must be paid.

But how? I would advance this- debt repatriation on a massive global scale never seen before through an ever- expansive series of debt forgiveness accords that are needed to complete the last phase, the winter, of this Kondratieff Wave cycle. The debt jubilee that is such a good thing is already upon us even though we can’t even see it yet. For example, the bondholder for Jefferson County in Alabama were forced recently to take a haircut of over $1 billion to prevent that municipality form going bankrupt (It still may).  That we can expect to see a great deal more of debt forgiveness it the future may be a titanic understatement. Folks, the jubilee process of this Kondratieff Winter has already begun.

I hope the sooner that global leaders can coordinate this global settlement the sooner we can expect to reap the rewards promised by the gains we’ve seen in technology and productivity made the past several years. That is our future and I just hope it comes sooner than later. The Kondratieff Spring is just around the corner.

Aug 17, 2011 Special Report: The Twilight of Paper Assets

Deconstructing the timeline of this Kondratieff Winter

Given the recent market turmoil I can’t imagine a better time than now to provide to our readers some guidance on how to assess where we are in the grand scheme of this Kondratieff Winter. Since the global financial meltdown began in 2008 it has been difficult to ascertain how far along this winter cycle phase had evolved because of the degree of interference that has taken place in the form of monetary and fiscal stimulus that has been unprecedented in it’s scope or breadth. The first wave that included TARP, the AIG and automotive bailouts, the homebuyer tax credits and cash for clunkers,etc. only helped the economy in the very short term as did Bernanke’s QE2 announced one year ago. However a clear pattern has been established – when these temporary measures expired the economy relapsed to a point worse off than before these programs were initiated. Such is the curse of an ignorant approach to fighting a Kondratieff Winter.

Kondratieff Wave theory strongly suggests that fighting an economic winter brought about through excessive credit with more credit is futile. I believe recent history confirms this despite Bernanke’s stubborn resolve to double down on further monetary stimulus when economic date reveals weakness. He firmly believes the critical mistake the Fed made in the 19030’s was being too timid in providing extraordinary monetary stimulus. His speech in 2002 that invoked Milton Friedman’s helicopter drop of money wasn’t to be taken literally. Yet his real intention was- to do everything under the sun and more to fight delation through any means necessary. Such a reckless approach sadly fails to recognize the limitations of Fed policy during the tail ends of credit super-cycles such as the present nor does it account for the potential for the serious unintended consequences of such a draconian approach. And most of all it does not square with Kondratieff theory that mandates that any efforts to increase debt during these periods compound the entire situation.  So on the eve of his crucial speech next Friday at Jackson Hole, Wyoming I seek to parse the present stage of this economic winter to better frame the economic and capital market backdrop underlying the present stage of the cycle.

The fledging European union is now in the late stages of a terminal debt cancer that is forcing hard decisions to be made by their leaders. The “kicking the can down the road” era is in it’s twilight, and the doubling down by the ECB and Germany is looking more each day like a fool’s errand. Here in the US it’s better but not by much. This is clear- the jury is out and most of us believe crucial mistakes have been made by our leaders. I find it really sad that President Obama rejected the Simpson-Bowles plan released last December. It was tough and called for the sacred cows of each party to be shot down, but no one listened and no one cared and we are worse today for such a disgraceful exhibition. Now that the perils of excessive debt are front page news each day let’s discus where we stand in the late stages of this economic winter unfolding before us each day.

Why? Because it matters, and more than we can appreciate.  Always has, but especially now. Where are we in this fourth Kondratieff Winter of the modern age?How exactly does it intersect with other larger forces (sovereign defaults, for example) now coming into the fold?  Purists of K-Wave theory may be excited because the threat of debt bombs soon exploding is sure to dominate the news for some time to come. But this condition is awful and nothing to revel in, and thus the primary focus for those who understand these themes should be centered on using the universal principles of long eave cycle dynamics to help us manage our own economies better. If this K-Winter comes about as I suspect I doubt many will celebrate.

Turning things around would be made more possible if our leaders better understood the nature of the natural cycles of economic growth in modern industrialized nations. Fortunately Nikolai Kondratieff greatly enhanced our ability to make this connection. The core themes set forth on this site come from our comrade, one Nikolai Kondratieff. In 1925 he wrote the magnum opus on long wave super-cycle economics- Long Waves in Economic Life. It was a brilliant treatise that was original in it’s presumptive theme that all markets are governed indirectly from forces not so well known even today. Sadly this is still true.

Comrade Kondratieff knew better even as early as 1925, decades before the digital revolution, that long-wave cycle theory was just too relevant to ignore.

That’s worth saying twice.  These long wave cycles matter, and we should take heed.These patterns of economic boom and bust have been a hallmark of the human socio-economic framework for so many eons and Kondratieff managed to develop a template of distinctive economic growth patterns that endures today. So lets now examine more closely why these themes are likely to still endure and why they matter now.

Framing the Backdrop

The prevailing theme of any Kondratieff Winter is that large amounts of debt can’t be sustained over time. This notion may seem trite but it’s quite compelling.Some would argue that the Kondratieff Winter peaked in 2008, and I wish I could agree with them. Here, I honestly hope I am wrong. But if this is the case then it would render K-Wave cycle theory far less meaningful as a tool for economic analysis in the future. Why? Because under K-Wave theory the economic winter doesn’t shift into a new super-cycle (60 years or so) until a large amount of the excesses of the previous cycle have been mitigated. It hasn’t, not by a long shot.

Now a quick primer on the dates that set up this fourth K-WInter of the modern era. This fourth cycle of the modern industrialized era began approximately in 1949 as the US began evolving from a wartime economy to one with high growth centered on the suburban boom and the onset of mass consumerism. Each of the four seasons in modern K-Wave cycles average approximately 15 years. The summer phase began in 1983 at the onset of the greatest bull market in world history. It ended in January 2000 when the market averages all peaked in real terms. Although the S&P and the Dow made nominal highs in 2007, these levels were far below the peak 2000 levels in real terms when adjusted for inflation. The NASDAQ topped out over 5000 in 2000 and only regained just a bit more than half at the 2007 highs and it’s now down over 80% today from its highs in 2000 when adjusted for inflation. So since it’s a fact that the highs in the market averages in real terms were posted over 11 years ago it’s hardly a stretch to argue that we have been in a Kondratieff Winter since then.

In previous K-Wave cycles, the pattern repeats. The summer is always has the biggest gains for stocks and the winter is the worst. That makes sense to me as  those two seasons are the extremes. But when you compare the present period to the late 1940’s, you begin to doubt we are beginning a new spring cycle of growth. In the late 1940‘s the US had dramatically reduced it’s debt and was growing at an incredible pace. And let’s remember that much of the debt that had accrued was an outlier due to WW2, unlike the present debt load which is the result of several decades of outliving our means.

The present economic winter began in 2000 and it’s worst effects have been put off through unprecedented stimulus from the US Treasury and the Fed. But  I hope our readers have figured out the good news by now- we are already 11 years into this winter, yes? That’s right, and that’s good news. But the flip-side is that the worst part of the winter may be upon us soon and during this relatively brief period a staggering amount of excesses must be rid from the system so we can begin a new cycle of growth on a firmer foundation. I expect that period to be 2013-2015 under the Kondratieff Wave theory. I feel the most damage to the capital markets and the economy will be from 2012-2013 as the accrued tensions of tens of trillions of debt that have been accumulated come to bear upon the markets. This will cause a great number of extremely large defaults that must be written off and only then can a new foundation for the spring cycle phase begin.

The approach from the Fed in the 1930’s in response to the Great Depression was  far more muted than today and as a result it lasted far longer than most could have imagined. But monetary policy alone cannot reverse decades of excesses that have accrued so under K-Wave theory the Great Depression would happened anyway. Fed policy today in response to the global financial crisis was the exact opposite and has been executed almost precisely as Bernanke asserted in his famous speech in 2002 that earned him the moniker “Helicopter Ben”. But if you subscribe to the K-Wave theory, then you realize what this means- by doubling and tripling down at each turn, Bernanke’s approach assures a much swifter but far more brutal end game. As anyone can see literally and intuitively, Fed policy over the past thirty years has spawned one bubble after another (internet- 2000, housing 2007, oil and nat gas 2008, etc.) One could easily argue the combination of near permanent ZIRP (zero int rate policy) and QE 1,2 etc have set the stage for the grandest bubble of all to burst- the US govt securities market, along with other sovereign debt markets.

Bernanke is still convinced Fed policy can defeat deflation and the man no doubt knows about the K-Wave, yet he still feels his alchemy can defeat the deflationary bubble at the heart of this Kondratieff Winter. The question of our time is this- can  Bernanke beat a deflationary winter that’s right on schedule? I believe he can’t because Fed policy in the modern era fails to acknowledge that loose monetary policy can’t stimulate growth at the margins. Evidence for this theme is abundant. Most notably, we have seen home prices steadily erode for six years despite mortgage rates at near record lows. I suspect one day the post-mortem from the modern Fed will center on this- you just can’t push on a string with low rates.

What other signs indicate an economic winter is already upon us? For starters, the moving averages of all the major indexes in the US and in many other major equity markets have been breached to the downside by a primary degree. And the absurdity of the staggering levels of global debt that have been attained are just awesome. We have been living large for too long with debt levels in local, state, federal, private, and corporate terms now at all-time highs and still beaming higher. Yet so few people today are aware of the nature or implications of long term economic wave theory. Thus, the Kondratieff WInter marches on in full display to the folly of those too ignorant to know the traits of an economic winter. There is some discourse and there are many headlines on the the significance of global debt levels, yet the mainstream financial press and nearly all our economic and political leaders still have yet to square the circle of the criticality of super cycle dynamics as they relate to modern global economies.

Another indication that we are now in the final throes of an economic winter can be seen through the sacred geometry found today in stock and bond charts.

First, let’s get to US Treasury bonds. Of particular interest is a key date that just happens to be today-August 22, 2011. That’s the 34 year anniversary since the thirty year bond began trading on the Chicago BOT. For a better perspective on the significance of this I have recently added to the sacred geometry tab a two page blog from Rick Santelli of CNBC who myself and many others consider to be a leading expert on the Treasury market. In his blog Santelli suggests a top may be soon at hand in US Treasuries due to the Fibonacci 34 year interval deemed to be very significant under the sacred geometry principles advanced by W. D. Gann, the legendary technician of the capital markets not so well known to most. More on this can be found in the Sacred Geometry tab in the Esoteric Section.

We can also also look to Kondratieff’s Wave theory to find a top forming in US bonds. If you remember, interest rates peaked in 1982 just as the summer phase cycle of the fourth Kondratieff Wave was beginning. Stocks and bonds both bottomed within a period of time that could be seen as minute in super-cycle terms. I would argue that stocks have performed very much in line with the K-Wave cycle but would also admit US Treasuries have not. In fact, US bonds, ceterus paribas, (holding all things constant) have since the beginning of the Kondratieff Winter in 2000 have dramatically outperformed equities and the reason is quite obvious- the Fed has maintained interest rates lower for longer during this period than at any other period of time in US history.

Moreover, the Fed has compounded this by resorting to the same desperate policy measures taken by Japan for decades- quantitative easing- to the tune of several trillions of dollars, thus skewing the Kondratieff Winter for bonds to a primary degree. To that end I will say this- the potential for losses for bonds during this winter is much larger than for stocks. Why? Because the stock prices of many cash rich corporate giants such as IBM, Apple, McDonalds, etc. will survive and perhaps even thrive during this winter. But most government bonds are fraught with much more inherent risk than now perceived by investors and could plunge far from their all-time highs now, especially if W.D. Gann’s math is right. If last Thursday’s auction of 30 year Treasury bonds is any indication, Gann is right on. Santelli gave the auction a grade of F for the first time ever.

Linking the K-Wave and Elliott Wave

The primary count today in the Elliott Wave also indicates the homestretch of the Kondratieff Winter has already begun. For several years, these charts have projected that a final wave down- the dreaded P3 Wave down- would finally come to mark the end of this economic super-cycle. The first wave down occurred from late 2007 until March 2009 and the P2 countertrend wave since then has baffled most bears because it extended farther and for longer than most of us thought possible. This P2 wave is essentially a bear market rally that was extended much farther as a direct result of the previously unfathomable policy measures taken primarily by the Federal Reserve and to a lesser extent the US Treasury.

It must me noted that the P2 countertrend rally from March 2009 until April 2011 satisfied Elliot Wave principles in that the high of 1370 in the S&P made in April fell well short of the October 2007 high of 1543. Thus the methodology underlying the P3 Wave down was intact all along yet there was one final element missing for the P3 wave to begin in earnest- a degradation of social mood. That finally occurred in late July courtesy of the Congressional debt ceiling fiasco that became the proverbial straw that broke the camel’s back. Fittingly the market decline in late July correlated precisely with this radical shift in public mood of hopelessness that Washington could provide any solutions to this mess.

The most recent Elliott Wave Theorist dovetailed very nicely with an abundance of distinct themes from Kondratiieff theory I have advanced here. FIrst is that the bulk of the damage coming in this winter will come during the final homestretch and the EWT projects that the bulk of the market losses will occur between now and the end of 2012 and extending through 2015. Prechter goes on to compare the present period to the 1937 period when the market began it’s worst stretch by losing over 83% in a very short period, a period Prechter incidentally regards as the last time we were in a Kondratieff Winter.

The EWT also examined exactly how this stealth economic winter was  able to take place under our noses for over a decade.  In fact most have been oblivious to it because the monetary debasement done by the Fed has made it not seem so bad to us but that’s only because we have been deluded by the nominal gains and haven’t adjusted for price gains in real terms.  Upon the further scrutiny of measuring the gains since 2000 Prechter chose to measure these vs. a Stable Currency Benchmark (a blend of hard currencies and gold) and these charts show those gains were illusory. Much like Michael Douglas said in the original Wall Street film-the illusion had become real.

Finally, the EW model overlays neatly with the end of the Kondratieff Cycle as occurring in 2015-16 as I have advanced here for years. The model suggests not only that this period will see an astonishing level of wealth destroyed in a short time, but more importantly that a multi-decade long term bottom will also be in place. If that occurs, the Kondratieff Wave will have played out much in line with its projected 15 year duration (2000-2015) as one of the four 15 year seasons in a 60 year economic super-cycle. And I suspect that would also shock those few sufficiently educated about the notion of economic super-cycles but were long convinced in it’s apparent holes. Again here, the illusion has become real.

The EWT also revisited many of the themes that have been put forth for years. Most prominent among them is that social mood, not corporate earnings, is the primary driver of the capital markets. With that in mind, just seeing what is happening around the globe makes me very wary that the capital markets will perform under the guidelines of the metrics that have shaped price behavior for the past several decades. I see a day soon where PE multiples will mean squat and Keynesian model for measuring economic performance will be thrown out the window. Western economies are imploding under the weight of global sovereign debt and may soon reach a point of no return when the austerity demanded to repay the mighty sovereign debt precluded that very debt from being repaid. It seems to be that we are now in the early ninth inning on the present economic winter with only one saving grace- a well coordinated program of jubilee for the massive defaults looming. But sadly I just don’t see the action on the ground to support this and neither do the charts. That said, it’s likely we are now in the twilight of the reign of paper assets that began in the early 1980’s.

I would like to also provide here some input from others for discussion that’s relevant the Kondratieff Wave. Noted cycle technician Martin Armstrong has developed an economic confidence model that calls for the present period to serve as a bottom in confidence that will precede several years of growth before a  multi-century bottom that would occur in the last 2020’s with a new grand super-cycle beginning in late 2032. Armstrong’s work is based upon a long wave cycle of 309 years plus and I have found his work to be extremely fascinating and very credible. I have recently added his most recent major piece in the K-Wave section of this site. I happen to disagree with him that the current cycle could be stretched that much further but who knows?

According to Biblical scholar Daniel Gregg the next Biblical jubilee is due to happen around this period in 2036. I have included on our site material from Gregg on this in the Jubilee section under the KW Spring tab. In the second piece titled “Will the Kondratieff Cycle Revert to the Jubilee Average?” Gregg takes aim at the historical overlay to these long cycles with the dates of each jubilee ever recorded since the days of the Hebrews. According to Gregg, the last one was in 1987 but did not take hold with wholesale debt forgiveness and thus the cycle was extended further out to 2007. One could argue that we are still in the jubilee period now and are on the verge of massive global defaults that will usher in the mother of all jubilees. In this piece Gregg also reasons that the Kondratieff Wave has been extended in duration due to technology and the scale of monetary stimulus that has taken effect. I agree with him on this and I believe this accounts for the increase in the economic long wave cycle over the eons from 51.6 years in earlier times to around 60 years now. Long Wave cycles need not be as overly precise as detractors would demand but instead sufficient to overcome scrutiny considered to be reasonable. After all human will does influence any outcome.

Conclusion

So what’s the bottom line for investors? I would advance this- we are now in the late innings of the final cycle phase of the Kondratieff Cycle- the winter- but  unlike the Great Depression we will endure a briefer but harsher economic winter and also that the difficult homestretch period has only just begun. Some of It’s worst effects can still be mitigated however if US and global leaders can come together and coordinate an effective jubilee that will serve to extinguish the bulk of non-performing debt so detrimental to global prosperity. We must come to see the Kondratieff Winter for what it really is- a wrecking ball that need only be used when we allow our own excesses to control our destiny. That is the case now as global debt levels are trumping everything in sight. To that end, i conclude with this from Daniel Gregg in his Jubilee piece on our site:

“The Jubilee is the Bible’s preventative measure against depression. If it were observed, then it would preempt the depressions and prevent them. But when the Jubilee isn’t observed, the natural economic cycle charted by Nikolai Kondratieff takes over.” Let’s hope our leaders soon discover this wisdom.

The Case for a Rising Yield Winter

In just the past week, perception has finally caught up with the reality we have been discussing here for several years.

Suddenly, debt levels do matter. They do trump corporate earnings and just about anything else for that matter. The complacency we alluded to last month has given way to full-blown fear. But this time is much different than 2008 when the markets plunged because the solvency of a few key institutions (AIG, Lehman, Fanny Mae, Citibank).  They collapsed then through the perception of counter-party-risk brought about by excessive leverage that was rampant for years throughout the financial system.

Today we are nearly three years into a massive de-leveraging process that is still far from removing the greater part of the excesses that have been built up for so long. Structural impediments to growth still abound with unemployment, housing and consumer confidence still ailing. The ugly mess in Washington with the struggle to raise the debt ceiling and the recent historic downgrade of US government debt by S&P dealt a strong blow to our own collective self- esteem that spilled over into the markets. And fittingly, selling volume has been far higher than the weak volume associated with the rallies over the past year.

Last week the major averages plunged over 7% and there’s a growing sense among investors and the public at large that things are spinning out of control. Years from now we may look back to this week as a paradigm shift in the collective consciousness to a new reality we have been loathe to confront- that we have ignored the true significance of global debt levels.The markets though are taking notice. Such an about face was characterized best by the greeting investors gave at the opening bell Monday after it became clear over the weekend that the debt ceiling would be raised. The opening gap up over 140 points was rudely dismissed in a matter of seconds and it was all downhill from there. Panic selling was evident throughout the week yet not capitulation, and that is a bit scary. We may be oversold a bit in the short term and the averages are quite capable of staging a modest rally soon but my sense is that the 1379 April highs on the S&P index won’t be eclipsed for a long, long time. Significant technical damage has been done that essentially broke the uptrend that had been in place since the spring of 2009. There’s no doubt that the preponderance of high frequency trading in the markets have accelerated this plunge and thus the move downward the past two weeks has been even swifter than in 2008.

It appears two distinct themes are in play now. One is the unfolding contagion in Europe that escalated to its highest level yet last week courtesy of the looming bailout of Italy, one of the largest economies in Europe. Investors are finally taking hold of the notion that a full blown crisis in Euro zone, the largest economy in the world, may impact global growth after all. Remarkably, until just days ago no one seemed to think it would.

The other and perhaps more damning though was the impression that the US and European political and economic leadership are clueless to deal with the tragedy unfolding before us each day. It’s clear to most that a perfect storm of self-serving interests and shocking ineptitude by our President, the Congress, the ECB, etc. has sapped the single most important element needed for the capital markets to function properly- confidence.

The stunning plunge in confidence seen lately is very frightening to me but well placed unfortunately.  It is compounded by the attrition brought on through decades of excessive credit and mal investment. Sovereign nations are now crumbling under the very weight of the credit markets that have been propped them up for far too long. Suddenly the capital markets have sensed this and have sold off sharply- except one- US Treasuries, the largest capital market anywhere. Here’s why I think a long term top is this overcrowded market is close at hand.

US Treasuries were just last Thursday at or near all-time highs at every maturity. SInce the global economic crisis began in 2007 we’ve seen the same pattern trace out- dollar down, stocks up and bonds flat to down during risk-on periods and vice-versa during risk off periods. However I believe this pattern is about to reverse soon if so it could shake the capital markets to their core. The bottom line? In the coming days or weeks, a liquidity crunch will take place the likes of which we have never seen before in our lifetimes and you can throw out all the past rules of thumb. Dollar up, stocks down. Risk-off, bonds down. In fact in such a period (i.e. the endgame of a K-Winter) the mantra is very simple- all paper assets including stocks, bonds, commodities, and even gold are down. Cash is king, not gold. And the rush to raise cash may have only just begun. Even US Treasuries are susceptible to liquidation.

Here’s how it could play out. As stocks plunge and margin calls mandate more selling stocks continue to sell off. Nothing new here, this has happened before (1929, 1987, 2008, etc). Even sacred cows such as gold get sold off hard such as in 2008 when gold plunged from $941 to $722 from August to September. Investors sell their winners to raise cash and meet margin calls. So this wouldn’t be too big a surprise. But a massive sell-off in US Treasuries across the curve would be a shock. It’s the one thing investors haven’t priced in one bit but it’s quite possible. I hope it doesn’t occur but I believe it will.

The scenario I am describing was put forth in recent months by the guys at my favorite site for daily Elliott Wave counts www.danericselliotwaveblogspots.com. I have come to admire their insight for a multitude for reasons chief among them their inclination to be humbled when they get the count wrong. I have alerted our readers in recent monthly blogs to the radical and quite unusual theory they have put forth regarding what will precipitate this final stage of the fourth Kondratieff Winter of the modern era. They call it a rising yield deflationary collapse, a theory that’s never made its way into collegiate

textbooks or event he modern lexicon because it’s never happened. But is sure makes sense to me. I always felt there would be a wrinkle that few had ever considered that would prove to be the defining element of the P3 wave down in the capital markets.  This is no ordinary deflationary collapse and I wouldn’t expect it to look like any other. A rising yield collapse that would baffle most academics and experts makes just too much sense to me to ignore.

Here’s how a rising yield winter could play out: Initially the yield curve flattens as fools rush in as the entire hedge fund universe flocks to Treasuries. The long bond gains the most in the first inning as the greed for high yield trumps any wisdom hedge fund managers learned years ago. The long bond should lead the surge down in yields and when the music stops I feel  it will lead it higher, dragging yields across the curve higher and ripping the faces off of those who dared to believe in the sanctity that this ultra-low environment would endure for the intermediate term. At some point yields will approach a brick wall where the intuition of the collective consciousness of the market will realize the absurdity of negative returns in real terms and once that reversal occurs all hell will break loose. The most transient money that recently invested on the basis of safety instead of strategy will bail right away to cut their losses. They didn’t want to be there anyway. Then real wealth destruction will begin as investors begin to fathom the folly of the ponzi scheme of global debt that trumps corporate earnings to a primary degree.

I want my readers to know this- the US Treasury market is ripe for a historic collapse. Look for the moments when bonds sell off in tandem with stocks as the inflection point when we will know that the bond market has pit in a milt-decade top.

At some point I suspect that other investors will smell a run on Treasures and then wake up and smell the coffee- bonds are a fools game today at the twilight of a Kondratieff Winter. Now this will absolutely shock 99% of the pundits and analysts out there who are still deluded under the notion that the Federal Reserve can control the bond market. Bernanke recently hurled his last Hail Mary and I suspect he will soon be invoking higher powers for guidance on these matters. I sure hope he gets the help he needs.

Any degradation at all could ignite more selling and give bond vigilantes the cover they need to short or just sell US Treasuries at these near record levels. The downgrade just announced by S&P may also induce holders of US bonds to sell and move into safer corporate bonds.  There could soon be a point of recognition collectively among investors that will indicate to everyone it’t time to bail on all Treasury bonds, especially at all-time highs. Can anyone give me one good reason today to not just sell Treasuries and be content with cash for the time being.  To me the safety of cash trumps the risk of being in US bonds. Never mind returns, just  be liquid.

Another piece suggesting a long term top is forming for bonds could be heard from CNBC’s Rick Santelli Thursday afternoon as he invoked the sacred geometry found in the work of W.D Gann, much to the shock and chagrin of his on-air colleagues. In short, these charts indicate that a major cycle reversal for bonds will happen sometime in the month of August 2011. This would complete a cycle that began in 1982 when the last cycle in interest rates peaked and if this occurs then higher interest rates will serve to stunt economic growth for years to come. Rising yields would also dramatically increase  the US government’s interest expense since so many trillions of debt must be rolled over in the short term. Our current debt expense each month exceeds $30 billion and that figure stands to rise a great deal higher in a rising yield environment. Although it doesn’t surprise me, it does worry me that so many investors are complacent to this possibility and that’s why I feel rising yields may be single biggest threat we face today.

So it will be interesting to see how well the 30 year auction goes on Thursday. Will foreigners step up once again to buy these bonds at all-time highs? What happens  once the music stops? Will we finally have a failed auction?

Note- for those wishing to bet against the US bond market I recommend shares in TBT, an exchange traded fund that moves inversely with the US long bond. It closed today at its all-time low today at $26.50/share. Consult your investment advisor before taking any action.

Theater of the Absurd forges on with new Greek bailouts, debt-ceiling impasse

The enduring credit contagion in Europe took another strange turn in late June. As the threat of more severe austerity loomed, the people of Athens revolted in front of the world…..for just a few moments. Such timidness on behalf of the Greek people, much like the Irish previously, was celebrated by the global capital markets ….. for a few days. Then, a new reality check was dealt to investors as sovereign debt concerns from Italy and the news that for the first time US debt was put on review for downgrade by a major ratings agency. The one thing we can all agree on today is that the perils of the tail end of the current credit super- cycle will be front and center in the national consciousness for a long, long time.

But look no further than the enormous snap-back rally since late June to see how far removed the the capital markets are from price discovery based upon truths that are allegedly absorbed by a broad audience. Modern capital markets are now now more noted for their manic depressive mood swings than for honest price discovery. Have no illusions- we are shouting from the rooftops today that the Kondradieff Winter proposition is more entrenched than ever. No girly-man rally on ultra-thin summertime volume is going to shake us off the K Winter theme so long as the hallmarks of an economic winter are so prominent at the fore. Gold closing at an all-time record high Friday is a blatant repudiation of the status quo coming from Washington and Wall Street. Until deflation is realized by investors, expect gold to soar higher as unprecedented uncertainties abound everywhere.

Of course at times equity markets can rally on a) no news (no disaster du jour) or b) disaster reported a tad less than market anticipated; or c) a stay of execution being granted for a very brief period. Option C seems to be the catalyst for the recent rally in the markets up until July 8th.

Otherwise what could justify an eight day rally of nearly 1000 points on the Dow? The news on the Greece bailouts came as expected and the markets bounced higher after testing their 200 day moving average around 1258. With disaster in Greece postponed for a short while, the bulls took over and the shorts panicked, especially when the ISM numbers came in higher than expected. But those who bought the market in early July on the notion the ISM readings together with the ADP payroll numbers indicated the economy had squared the circle of the so- called “soft patch” were taken to the woodshed much like the shorts who threw in the towel and covered.

Accordingly, there have been more whipsaw periods in the markets this year than ever before. Why? Because basically since the global financial crisis began in the summer of 2007, the markets have seen several cycle periods of fear followed then by relief rallies coming from strong and improving earnings from mostsectors except housing and financials. The financials are still today the worst performing sector of all and this doesnʼt bode well for the overall markets since our economy badly needs credit expansion from this important sector.

Also, has anyone noticed that in 2011 the period between these cycle phases seems to be getting shorter? Last week, the feast following the close call on Greece had not yet even been digested before the indigestion of Italy and the Non-Farm Payrolls began to set in. I suspect this will be the norm for some time until the greater portion of the remaining phase of the Kondratieff Winter is completed. So investors, please chew your financial food slowly and be prepared to digest whatʼs ahead. Preservation of capital, not returns, is paramount today.

Of course very few of the talking heads out there would say such a thing. After all, they will tell you that cash HAS to be deployed somewhere, right? This makes sense, right? Not really. Cash making no interest actually outperforms just about everything under the sun in a Kondratieff Winter because it can buy more and more each day due assets plunging in a deflationary winter. But most American investors have a hard time reconciling this because in the back (and front) of their minds they are afraid that the purchasing power of their cash will be eroded by a plunging dollar. And of course even fewer have the spine to short stocks. Paradoxically, this is very bearish for stocks since so few are now short stocks.

Something else is bothering me that gets virtually no attention in the mainstream financial press. It relates to a rather disturbing technical trend that matters a great deal to me- the trajectory of yields on 30 yr bonds overlayed with the trajectory of the USD index against a basket of global currencies. The conclusion to me here is radical- that the technical trends suggest we are in a raging bull market on the USD and on yields on the 30 year bond. Now of course the obvious rebuttal from ay cynic would be………“Youʼre kidding, right” and I would say no, not one bit. Everything points to a breakout on the USD and a breakdown on the 30 yr bond. The charts indicate to me that the 30 yr bond is the key. Itʼs chart in recent years shows a pattern of making higher lows- 2.5% at the 2008 crash, 3.0% last spring during the Greek contagion and 3.5% recently. I call this a stealth crash in the making for the 30 yr bond. The higher lows in the face of massive QE from the FED during this period indicated much higher yields on 30 yr paper now that the Sugar Daddy Fed is gone.

And in such a strange world I expect the dollar to be quite strong, thank you. Investors can just maintain a simple rule of thumb- if a theme (dollar is toast, deflation is licked, etc) is seen to be a sure thing by the mainstream, consider betting squarely against against that theme. Such a strategy would have shown handsome profits over the years. So for the record- we are long USD, short paper assets to benefit from deflation, and short the long end of the Treasury curve. These directional bets would all work in any economic winter environment.

Iʼm confident the dollar is now on strong footing for the short and intermediate term. I have addressed this theme several times over the years in monthly comments, most recently on the ones posted April 4th of this year. The dollar is still the strongest fiat currency in the world (for now) and unless US sovereign debt is downgraded by the rating agencies it will continue to command a high premium to currencies of any indebted nations (the entire western world, sans Norway, Switzerland and a few others). It held its channel low of 2008 in April and has found quite a bid since that time. In fact, if it continues higher and can close convincingly over 76 on the USD index, itʼs sure to break out to the early to mid 80ʼs. If this occurs it could trigger a correction in equities from 15-20% based on the close correlation in recent years to the risk-on/risk/off trade so much at the heart of the dysfunction in todayʼs capital markets.

This present dysfunction is not limited to the maniacal “risk on/risk off” switch that vacillates between the prevailing “all in” vs. “Iʼm out of here” modalities at the frontal lobes of investors each of trading. A potpourri of other maladies can be seen through investorʼs behavior that is quite alarming. Most alarming is a complete aversion to economic realities whose impact could possibly be felt during a period beyond the marketʼs next trading day. Hell be damned, in other words. In past eras, only real shocks could reverse market sentiment. What does this imply about the future given the hundreds of trillions in outstanding derivatives that could be affected by nasty mood swings by the capital markets?

It implies complacency on a grand scale. The most obvious case of this involves the present quagmire over the debt ceiling. I do expect at least a short term fix but canʼt predict how it will be received by investors. I will proffer this nugget to our readers today- there may be a huge wild card out there that virtually no one (including myself) can predict. These may include a downgrade of US debt by Moodyʼs despite an announced extension of the debt ceiling, or perhaps China throwing down the gauntlet in disgust over our inability to get our house in order. In any case, the stock and bond markets are truly complacent, choosing to see the glass half-full via strong corporate profits. But complacency thrives in such a vacuum, and letʼs remember that in July 2008 complacency also ruled the day.

Now to the grande finale- the raising of the US debt ceiling. So much to say here, but so little space. But a core theme here is the shared complicity among all parties that the chief problem (debt) is born from very long term causes and must be remedied with this in mind. It is our belief that our leaders must reconcile our debt crisis in terms of long wave super-cycle dynamics that instead of the short term fixes exacerbate a growing cancer. I ask our readers to examine the material on our site and ask themselves if itʼs absurd to expect a miracle from measures that have never worked before. If citizens push the envelope on this, our leaders will reconsider and adjust if they are forced. Letʼs hope that cooler heads and bright minds will prevail in this epic struggle to reign in the titanic debt loads in the US and the Western world.

A real Game of “Chicken”

The slide in the US markets for the past five straight weeks accelerated to a primary degree in recent days as economic data from a variety of areas indicated the so-called economic recovery in place was halted in its tracks. Most shocking was the employment data just released from the US Department of Labor that revealed a paltry 54,000 jobs created in the month of April. This level was so small it caused the unemployment rate to climb back over 9% as more workers sought jobs. The data also confirmed another damaging trend- workers are working less hours and are getting paid less for their work.

Since the labor markets are the mother’s milk of any growing and prosperous economy, it’s worth exploring what causes this so we can make the right changes. It is my belief that a great deal of blame lies in the very structure of our economic system. Certain content on our site has introduced these themes, including the central planning of our economy by the Executive branch and Congress, the unabated de-basement of our currency by the Federal Reserve that destroys the purchasing power of our citizens, the objective of corporations to serve their shareholders at the expense of the public, etc. We can only hope these conditions will change through a wholesale reform of the political, social and economic infrastructure supporting the present landscape. Although such potent reform is unlikely to occur through incremental change, it could unfold in response to a severe condition, namely one brought about by a Kondratieff Winter.

Such a condition would be preceded by deflation, the mother’s milk of any Kondratieff Winter. And although deflation has been in a somewhat stealth for some time now (unless you own a home) due to the rise in paper assets courtesy of the Fed’s bag of tricks, it is anything but stealth now. Commodities not named gold have declined sharply for several weeks and so have stocks. But the recent data from Case Shiller just released may be the best evidence of all that deflation still persists. This report should be a real wake-up call to those who have been swearing off deflation as if they were choosing not to participate in a world having such an evil.

Yet deflation has many attributes, most notably of all is the affordability it can create. Deflation allows nature to take its course by letting asset prices move to their true clearing price. Deflation does not obfuscate the true economic picture so that capital can be deployed with full confidence in the ventures that so badly need it. Yet sadly we inhabit a zombie-like state of economic paranoia that cripples investment, bank lending, and economic vitality. As long as the Fed is monetizing our debt and our government is spending trillions to stimulate a zombie, we can expect to see at best a prolonged stagflation much like Japan has endured over the past twenty years or at worst something quite unlike what most can imagine. Deflation should be embraced, not feared. It can be a good thing, just like inflation can be good if it is present in wages.

Deflation occurs as a result of excessive debt, and excessive debt is the signature  hallmark of the US and Western economies. The ability of sovereign nations to service that debt is now being challenged for the first time with a flurry of recent downgrades in the debt of a multitude of sovereign nations. Even the US was put on watch by S&P recently but the markets just yawned. But I sense a subtle change in basic investor apprehension regarding these staggering debt loads that boggle the mind. The US must borrow over $4 billion each day just to stay afloat and we are now resorting to nothing short of fanciful accounting to avoid defaulting on our government debt obligations.

This is pathetic, and now the biggest game of chicken in our history is being played out in the halls of Congress. One petulant group (the Democrats) wants to avoid the spending cuts needed to get our house in order while another petulant group (the Republicans) are demanding the spending cuts without any increase in taxes whatsoever, as if raising  taxes is akin to mass murder. We need both for real reform, but frankly I believe that spending cuts are more important because in terms of scale they dwarf the levels any tax increase would bring at the margin. We must remember that the US was quite a global powerhouse from the 1950’s through the 1980”s when tax rates were so much higher and our spending was so much lower. Some give on both sides is needed, even if its highly titled toward spending cuts.

How will this game of “chicken” play out? A vote last week in Congress revealed just how much of a hurdle there is to get an agreement, as almost four in five members of Congress voted against raising the debt ceiling. This is sure to come down to the 12th hour, just like the budget battle in April but with so much more at stake. While it does seem like a game of “chicken” in its ultimate form, I suggest another game of chicken has been playing out for decades- how our government leaders are chicken to do what’s best for our country. Instead they seem to always choose the politically expedient measure, even if it’s no solution at all. And for our part, US citizens have also been too chicken to demand and define the changes we deserve. Let’s hope that this debt ceiling increase does get approved and let’s also hope it clears the way for a renewed spirit of compromise going forward that will provide more of the change we all deserve.It’s time to have an adult conversation of matters of such importance.

Amazingly, until just days ago the consensus was that global economic growth for the coming years would be mighty. Now forecasters are slashing growth rates faster than you can say “gotcha” to those who form the consensus opinion, i.e. Wall Street analysts, pundits, journalists, and many noted hedge fund managers. In recent days the number of searches on the net for “kondratieff winter” have surged yet of course to date I have never seen the term Kondratieff Winter mentioned in a major mainstream outlet. I will bet anyone a gold bar you will see it soon.

Fed to US citizens: Drop Dead! Runaway inflation is transitory because we say it is

Last week Chairman Bernanke maintained his stance on an overly accommodative monetary policy making the US the only country refusing to put the brakes on the easy money. That Fed policy is so starkly divergent to the rest of the world has lead the US dollar to all-time lows against many currencies and within an eyelash of an all-out run on the USD. The Fed could care less. All that matters to the Fed is propping up asset prices to the detriment of over 90% of our population who lose purchasing power from higher prices and no interest on their savings. Even stock appreciation is negated as the USD is now down more ytd than the gains in the S&P. There’s no free lunch on Wall St.

In the first press conference in the history of the star-crossed Fed, Bernanke calmly knocked the softballs lobbed by journalists out of the park. The ones that had any zip he refused to answer and this was allowed to stand. (Too bad Ron Paul wasn’t in the crowd.) I would have asked him to defend my claim that the Fed is running a Ponzi scheme and asked who was in line to buy all their toxic assets, among others. But for the time being, they get a hall pass and the illusion of transparency. But in having the audacity to claim that inflation today is “transitory”, Ben may have sown the seeds for his undoing.  Let’s examine his claim further.

First, let’s be clear that the markets didn’t buy it one bit. They are calling his bluff on this in a spectacular way as gold and silver continued to explode higher to all-time nominal highs while the dollar sunk to near all-time lows. They can appreciate the sheer folly of maintaining such reckless open ended easy money policies. Markets can appreciate that inflation is not in the least transitory because higher energy and food prices are in large part due to compounding human population growth and supply constraints. This basic equation suggests higher prices and together with easy money fiat printing leads to investor speculation that drives prices higher than they otherwise be.

What the Fed is so blind to is that their policies dare speculation to pile on and drive prices so much higher. So it’s no surprise inflation is taking hold so quickly this year as the Fed keeps waving the all clear sign. Food and energy prices have been soaring for years now, so this is no passing fad. Yet sadly we allow the government to measure inflation in a way that ignores reality and this is a key enabler to our enormous deficits and sinking dollar. The Fed has willfully created a self-fulfilling prophecy of higher inflation through this un-virtuous cycle loop. I expect this cycle to reach a critical mass later this year that will force them to reverse policy much quicker than they would have preferred. I suspect then that the merits of maintaining such an easy money track for so long will come under great fire. Ben and the Fed have dug in their heals not just on QE2 but on the very notion that monetary policy is not inflationary. The only thing I see that can be called “transitory” is the current Fed policy of currency debasement.

I suspect the asset inflation express train to keep rolling higher but not without sharp reversals and increased volatility. The market short term is extremely overbought and is displaying exhaustion to a primary degree. Many believe we have broken out to the upside but few have noted the exceptional divergence in place now with the Dow Transports taking out their 2007 highs while the S&P and Dow Jones averages are still well off their all-time highs. This is a serious blow to Dow Theory and cannot be ignored. And S&P earnings are likely peaking this quarter as the recent explosion in inflation, the Japan earthquake, and other factors served to derail GDP growth in Q1 to only 1.8% from over 3% the previous quarter. Meanwhile, the western world keeps issuing paper iou’s like never before, setting the stage later this year for an acceleration of the de-leveraging process that began in 2007 that has taken a pause in recent quarters.

Despite the recent plunge in the USD, I still believe it will find a hard bottom by the summer as investors come to realize that Japan and the Euro region have much more challenging obstacles to growth than the US. The continued slide of the dollar until then will incite more rancor here that will pressure the Fed to keep its word in ending QE2 this summer. I expect at some point a sea change in global asset allocation to a risk-off mode that will enable the USD to catch a serious bid. Paper assets will increase for a bit longer but are likely in the twilight of an epic run that began in 1982 when the autumn phase of the Kondratieff cycle began. When the Fed’s policies are appreciated to be inflationary and counter-productive, a tipping point could be reached that could cause a serious unwind of paper assets the likes of which we have never seen.

March Madness: Jupiter’s Juggernaut Mocks the Black Swans

Those expecting the sharp sell-off in mid-March to continue given so much global turmoil must feel bewildered today with the amazing rally of the past two weeks. In fact, most US averages and indexes closed Friday at multi-year highs in the face of major headline risk events such as earthquakes, tsunami’s, nuclear meltdowns coupled with multiple revolutions and a new war in the Mideast. I’m sure many are now asking themselves this- what’s going on here and why is the K-Winter so long overdue?

In the past, I would have been in the same camp as those bewildered and would have been caught short again in a rising market. But last spring I stumbled upon the theme of mundane financial astrology through Ray Merriman’s site www.mmacycles.com and found a cogent approach to making sense of the madness before us in the markets today. Since then I have read his free weekly forecasts and have found them to be the most accurate anywhere.  Perhaps mundane astrology holds they key to forecasting the timing of the onset of the next economic winter. It’s a fine complement to the Elliott Wave approach based on stock charting and the Kondratieff Wave theory based on long term economic cycles. Although it’s less known to most that the EW or KW, financial astrology offers a basis for the cause-effect that influence the markets that the others aren’t designed to provide, and such a tool can be very useful these days.

I have presented Merriman’s themes here in the past and they were evident last month. His core theme is that the prevailing influences of Jupiter and Uranus in Aries over the past several months (and into early June) give us what he calls the “asset inflation train that doesn’t stop for red lights”.  This is exactly what has happened as the markets have shrugged off any bad news no matter how huge.  This bad ass train is still a runaway juggernaut today, trouncing any obstacles in its way. During such a mighty alignment we must discard logic and see that the momentum and the manic nature of its influence rule over any coherent analysis. The Jupiter influences of speculation, grand scale and excess rule the day. Does anything else better explain this madness?

But most runaway trains do end up in the scrap heap, and I still expect the deflationary forces underpinning a Kondratieff Winter to emerge during this summer. On June 4 of this year Jupiter advances to Taurus and according to mundane financial astrology this Jupiter effect will be diminished. Coincidentally, near that time the Fed is expected to announce halt the famed “QE 2” program that has been goosing the markets since last fall. Other deflationary pressures are mounting such as the US housing market and European sovereign debt which both seem headed for the proverbial “double-dip” pretty soon. But in the near tern it seems clear that unlike recent history, equity markets are refusing to discount such scenarios. That’s what we get with Jupiter’s juggernaut.  The other aspect of Jupiter and Uranus in Aries relates to sudden and shocking events.

Many such events occurred in March beginning with revolutions across the Arab world to the tragic earthquake in Japan on arch 11th. It seems like the chaos is everywhere and no matter how tragic these developments are sure to raise our consciousness to some degree. The material in several areas on our site suggest there is a very a distinct order to this that belies its perceived chaos. This material suggests that these events can be foreseen to some degree through cycle patterns over long periods and their intended purpose to raise our collective consciousness to effect changes that are long overdue.  Certainly I have no illusions that most will agree or trust such a thesis, but perhaps some of our readers who have seen this material before these events may be more inclined after this recent chain reaction.  As Ian Lundgold proposed in the video in our Mayan Calendar section, we are on a schedule that encourages the evolution of consciousness through what happens in our world. And the events of recent weeks have likely caused many to internalize how we view the world and that’s a good thing.

Such dramatic times as these by nature lend themselves to so-called black swan events that now appear to happen all the time. I read Nassim Taleb’s gem The Black Swan: The Impact of the Highly Improbable and took special note of how Taleb parses what constitutes a true black swan event. After absorbing this I dare to say that the global financial crisis of 2008 and what has transpired recently just doesn’t make the grade as a black swan. Why? It was possible to see it coming if you were aware. I put content on our site some years ago forecasting a gaggle of black swan events that did occur- a housing crash, a stock market meltdown, a sudden freeze in credit and the theme of social changes now unfolding caused by an expanded consciousness around the globe. But mere mortals such as myself are incapable by axion of predicting black swan events. A real black swan event is sufficiently unforeseen and dramatic it effects change at the core. But today we remain stuck in the mindset and practices of what enabled the meltdown in 2008. It seems we are demanding a more radical event to shake us from our ignorance, complacency, and indifference to these unsustainable conditions. This is why I still believe a Kondratieff Winter is likely to occur between late 2011 and 2013.

Historically, so-called fat tail risks are much more likely. They are exogenous events that were miscalculated by experts and analysts. An example of this was the Russian debt default in 1998 that befuddled analysts because Russia was not so imperiled to default. But the market underestimated the tail risk of political will to comply with debt payback and thus the unlikely default. This happens all the time in our world yet the capital markets fail to account for this risk or the more unnerving black swan event. It’s not in their DNA to tell the world- hey, this will happen so raise your risk premiums. So the breakdown in pricing tail risk here is a combination of the twin towers of deception in the  word of risk- arrogance and complacency. Yet both abound today because the modeling  done by most assumes a normal distribution of risk along the spectrum as evidenced through the pathetically outdated Gaussian distribution model upon which risk is priced today in our capital markets. It’s unfortunate that something so important as this is rarely ever discussed in the financial mainstream- until after the fact.

Perhaps the preponderance in recent weeks of so many black swan impostors means that a real one is on the horizon. Perhaps a short squeeze on the US Dollar?

Ask any pundit or Joe on the street and he’ll tell you today the US dollar is toast. I’ll take the other side of that trade.  The US is still the largest economy in the world and our best companies are gaining ground. We are not as fragmented politically,geographically, and socially as our only peer (Euro). But perhaps most under appreciated of all, the dollar will benefit from something few have considered- how well entrenched its status as the world’s reserve currency comes from the sheer breadth and magnitude of existing dollar denominated contractual obligations between global counter-parties. Although the eventual demise of the US dollar is likely, how it could play out is sure to deviate from any present forecast. Absent circumstances so extraordinary, any accelerated unwind of a USD standard is highly unlikely in the short term. Later this week the EC is expected to raise interest rates for the first time in since 2009 but it may already be priced in the the EUR/USD. But if Trichet’s comments are anything less than hawkish, expect the Euro to sell off. They are a long way from escaping their debt woes.

A key ingredient in the recipe for future dollar strength will be the collapse of the Japanese yen against all currencies, but especially against the USD. This collapse is more likely today than ever before despite the fact that days ago the yen rose to the strongest level vs. the dollar in modern history. This is madness! Japan is in the most financial peril today of any country in the world since WW2 ended. Their debt to GDP is 225% and they were just hit with one of the biggest earthquakes in history that is sure increase their debt substantially immediately. They must import nearly everything and their single strength (manufacturing) will be hampered for years to come from the quake and tsunami that hit on March 11th. THe knee-jerk reaction in the currency markets was to bid the yen to all-time highs under a neanderthal philosophy that an abundance of global capital would be forced to convert to yen and the currency speculators did what most speculators do- leap off a tall building with no regard to the landing.

I just wonder if Ben realizes how tragic and hopeless it is to defeat a deflationary economic winter through a credit based solution. I wonder sometimes which specific day that he will see that fiat currency based debt monetization can only goose markets for a while before the piper must be paid. He must be paid, and I suspect that soon Japan’s creditors will see a black hole and demand the changes we are seeing now in Ireland, Portugal, Greece etc. Yes I do see a hard landing in the PIGS countries, Japan, and finally the US. I expect the deflationary forces to emerge once the perception that Japan is likely to default on much of its debt obligations.

Japan is where I see the bond vigilantes will make their first bold move. They will finally realize what I suspect- trillions of Japanese debt will default. Although the Yen is now at an all-time high vs the USD, it won’t endure. So look out for a strong comeback in now deposed King Dollar in the near term unless it breaks its 2008 lows of 74. Such a breach would imply a far greater move lower in the dollar and much higher inflation. Let’s hope our leaders defend our currency  and the purchasing power of most citizens through pro growth economic policies not encumbered with fiscal or monetary policy steroids already proven to be debilitating and destabilizing.

Revolutions Abroad, But Devolution Here

Since my last comments were posted much has changed in the world, but not so much here in the US. While Egypt was busy toppling it’s military dictator for the past 40 years  and other regimes in the Middle East were being confronted with a revolutionary spirit taking hold across the region, US officials countered by extending the mandatory debt ceiling for a period of twelve whole days. That says it all my friends abut the relative state of change vis a vis the US and the rest of the world. We are taking safe baby steps while the rest of the world forges ahead with bold plans for real change. Here, we consider real change as having the nerve to parse some vernacular. We must do more.

The US is now the tortoise to the progressive hare of the booming emerging economies of our age (Singapore, Taiwan, Malasia, etc.). Yet the US  seems tethered to our past by overspending and pretending to be serious about real change. The contrast in the approach to real change between the US and the impoverished people of the Middle East should be remarkable to watch unfold in the near future. Do you think we’ll ever through the bums out? Who is being progressive here, folks? It takes sacrifice and being able to make hard and unpleasant choices.

History suggests that progress is made through tough choices. Churchill offered no illusions while Neville Chamberlain assured England everything was just fine. Perhaps we are at such a crossroads again of moral leadership in the western world. Historically at crossroads you though them bums out, and I hope we do but with respect.

And maybe we should given the steady erosion of living standards in the US. Despite the persistent melt-up rally on thin volume since QE2 debt monetization was enacted by the Fed last fall, the purchasing power of most Americans has markedly declined over time and has even accelerated in recent months as inflation has taken center stage all over the world. Surging food inflation is behind the riots in Tunisia, Egypt, Bahrain as food comprises over 40% of the average wage of those citizens. Fuel inflation spurred sharp declines in the US stock markets on Monday and Friday last week as investors were reminded that fuel inflation preceded steep drops in the stock markets in 2008.

Despite the rhetoric from Bernanke, the Fed’s gonzo loose money bonanza does export inflation  to the rest of the world. But each time we see on TV the unrest in the Middle East we can at least be reminded that some actual good may come from this. Then at the pump we are also reminded of how QE2 hits us all directly. Oh what a joy to have the Fed part of our daily lives. Well, until we revolt against the Fed we can expect more of the same.

But why is the Fed in the first place so committed to radical inflationary policies such as QE2 despite increasing evidence of a broad economic recovery in the US? I think they fear a deflationary asset bubble much more than they lead on. They rely on a dubious  “output gap” approach that assumes that if unemployment is relatively high and wage inflation is relative low then capacity utilization is low and thus inflation will remain low. But such a model is nothing more than political cover for their policies. As Fed Governor Hoenig recently commented, inflation coming from the Fed is likely to be “insidious” in nature, creeping and hovering about and revealing itself when it’s too big to effectively thwart especially given the capricious and downright ludicrous way our government chooses to measure the key economic indicators. Inflation excludes the two elements we can’t do without (food and energy), unemployment fails to measure those not looking for work (millions), and GDP data includes paper transactions that don’t create anything real. It’s an axiom these measures will always overstate our true economic condition.

Other measures can’t be fudged, and these indicators are very troubling. They include among others reduced tax receipts that bely the reported GPD growth, insider selling of public companies at a 15 to 1 clip, the highest reported food prices in over twenty years, a stunning plunge of 70% in one year of the Baltic Dry Index that measures global shipping activity, and a renewed pace of housing price declines that suggest a double-dip in housing has already begun. These developments may account for the recent revision in GDP for the 4th quarter of 2010 to under 3% despite the most prolific fiscal and monetary stimulus ever conceived. And market internals also suggest trouble ahead for the stock market as the divergence between volume and price gains have been huge for over one year as conviction is only seen in sell-offs. But although I am confident that the markets will continue to decline in the near term as the dollar makes a  strong comeback,  I see one more rally ahead into the summer before the exhaustion gap is filled that will precede a severe and protracted decline in stocks.

The coming weeks will feature a political standoff over increasing the budget ceiling that now stands at $14.2 trillion. This will mark the third increase needed in just a few years since the global financial crisis began and the new cap will have to be around $20 trillion

given the projected deficits of the next few years. During this period we will be forced as a nation to take a hard look at our path and be reminded of how painful the process is likely to be. It could be compared with a middle-aged person going in for a routine exam and finding out they have a condition that could be terminal without a drastic lifestyle change. Are we ready to confront our own mortality? Until now, the answer has been a firm no. I believe that the best way to confront this is by engaging in vigorous discourse in two key areas above all else- addressing the toxic assets on the Fed’s balance sheet and reducing the outlays of the four horsemen of the apocalypse- Medicare, Medicaid, Social Security and defense spending. Any plan not including these as major areas of reform is just conversation.

We have entered a new period marking the most dramatic transformation in human history ever seen on many fronts- socially, politically, and economically. It is with this in mind that I included on this site some unique content relating to this profound change. The KW and the Mayan Calendar examines the intersection of social and economic change over long super-cycle periods and includes a two hour video from Ian Lundgold that’s not typical from a site devoted to economic theory. It was added to this site two years ago and among it’s core themes was the idea that a radical global transformation would be soon taking lace that would be the culmination of a very long super-cycle of human evolution in consciousness. Given the recent events in the Middle East, I would urge our readers to check this out. We felt the need to offer this given that the vacuum of such content by a mainstream media more interested in profits and distraction.

The Fed’s balance sheet can be seen resembling what lies on the other side beyond the looking glass. The illusion remains real so long as it is perceived as real. Sadly, we are all beholden to this confidence game that is larger than all of us. Bernanke believes the sophistication of their monetization scheme can endure any storm. I dare to say that any investment in US equities may be considered a bet on maintaining this confidence game. So long as the Fed’s ponzi can be sustained, then the earnings power of many mighty US companies will command high valuations. And for now, they have. But…

But these earnings are susceptible to systemic shocks to the financial system. The Kondratieff theory suggests that de-leveraging must occur at such a late stage of the economic super-cycle but instead the Fed and Obama Administration have created the opposite effect- an extended re-leveraging of debt and fiat currency of a primary degree with an amplitude that would make Meyer Rothschild blush with envy. As Gordon Gekko gushed in the original Wall Street movie, “the illusion has become real “. It sure seems so as nearly everyone believes today that the financial alchemy of the Fed can save us from any cyclical Depression. We will eventually see whether this is true or not in the grandest game of chicken ever seen.

How will the Kondratieff Winter Play out in 2011?

I’m quite sure many interested in long wave theory are now bewildered by the fact that the global capital markets have not yet imploded. In recent months I have added content indicating the fourth Kondratieff Winter was pushed out due to the reckless policy directives of the Fed and global central banks to monetize their own debt. In the short run, yes, they have stimulated modest economic recovery in the US and beyond. Yet at the same time these measures have complicated the unwinding of monetization to a primary degree and directly threaten the recovery they very seek to sustain.

So as we consider the outlook for 2011 in the capital markets and the relative stage of where we stand in the Kondratieff Cycle, let’s make some observations that can’t be refuted. First, the sovereign debt in Western nations continues to spiral out of control and is undoubtedly unsustainable. In recent months, debt auctions of all countries that are over-leveraged have become nothing less than a complete farce. Last week the ECB bought Portugal debt in the days preceding their crucial debt auction to prevent an outright failed auction. Here, the desperation is palatable. And in recent Treasury auctions of ten and thirty year maturities the Fed likewise has done likewise in buying (monetizing) most of our debt. That the Fed has now recently surpassed China as the biggest holder of US Treasuries and has also exceeded the $ 1 trillion level has severe implications. People, this is what happens in a Kondratieff WInter.

Such behavior makes denying that a deflationary winter can’t happen is pretty tough to swallow. The only difference between this period and the 1930’s is that this Fed is more sophisticated in its obfuscation of their true policy intentions. You can chalk that up to one committed and unflappable monetarist, one Ben Bernanke. That said, I must say I admire sheer genius when I see it, even if it’s misguided in my belief.

Ray Merriman’s financial astrology forecast of 2011 weighed in on this in unusually harsh terms but in line with his past leanings on this. I have reported this in previous blogs because I feel its importance cannot be overstated. So as I read Merriman’s much anticipated forecast last month for 2011, I was all at once pleased and also surprised to read that his single greatest “off the charts” prediction for 2011 was that the Fed would undergo a transformation that would bring great shock to the world. Most intriguing to me was the wording surrounding this forecast when framed against everything else- it was as close to emphatic as it gets for a professional financial astrologer of his merit. While the preponderance of financial forecasts in this book relating to commodities, stocks, bonds, the US markets, etc., etc., etc. are all hedged with the standard double-speak normally associated with broad projections, this one about the FED stood out big-time. And he has been setting this up for nine months on his site by citing Helicopter Ben’s natal chart and his penchant for grand long shots within a mental framework that belies his placid public demeanor. Merriman knows the REAL Bernanke, and since I dared to believe Merriman’s account of Big Ben I now see the light. He is an “all in” type, very heavily invested in his own prerogative. So anyone knowing this early on like Merriman or his clients would know Ben will always err on the side of huge risk. That’s what he does, and that’s what he’s doing. He’s has too much conviction to be a phony.

Another observation supporting the deflationary bubble is bursting is the yield creep along the Treasury curve since QE2 was announced in late August. Never mind that prices for many things are soaring higher, namely food and energy, I prefer to look at the direction of asset prices. Our largest asset class, homes, has steadily declined in the face of unprecedented fiscal and monetary stimulus. And with interest rates on the move higher, I suspect home prices to remain muddled for years due to a glut of foreclosures that will take years to work through. High unemployment, stagnant wages, rising inflation of basic necessities such as food and energy all work to put a ceiling on real economic growth and prosperity among the people.

Declining home values and rising interest rates are crucial forces indicating deflation will win out as this credit super-cycle plays out, yet I don’t see deflation taking hold until later this year. The shorter term business cycle is winning out at present due to the replenishing of an inventory build that was depleted more than we had ever seen but it is close to being finished.  Stocks have moved higher in recent months in large part from this cycle build combined with a zealous Fed determined to put a bid under this market- no matter what the consequence. So my central theme for 2011 is this- the evidence abounds that the aggregate debt levels of sovereign governments (including state and muni debt) indicate we are in the twilight of this debt super-cycle and that the hallmark features of the Kondratieff Winter are evident and accelerating. But due to the Fed and other forces mentioned above, the day of reckoning is still not upon us yet. But some markers already indicate the the tattle-tale signs that the Winter is looming.

Chief among them is the debt ceiling of $14 trillion that must be increased by the end of March or the US government will default on its debt. The last time this showdown was so serious was early in 1995, and many areas of the US government did in fact shut down briefly as the Republicans took over Congress and called President Clinton’s bluff. But the US debt levels then were just a fraction of what they are today, and the threat of default on US government securities was not in play. It is now, and I expect some high noon drama in the coming weeks before a last minute settlement will be reached on increasing the debt limit for the third time in a just a few years.

But the damage will be done to the implicit credit quality of US govt debt, and interest rates are likely to enter a new trajectory higher. While the removal of this event risk will be cheered by the markets at first, the yield creep across the entire spectrum of US Treasury debt will prove to be quite a formidable market force for stocks to overcome later this year. Yield creep can quickly morph into something much worse if the present perception of US debt is ever replaced with even a hint or a whiff that all US debt is just one big Ponzi. Even without this development,  a reversion to the mean for rates has already begun and is likely to undermine any sustained economic growth until the cycle is complete. Since Congress recently extended the Bush tax cuts without any cuts in spending, it is near certain that the bond vigilantes will make make sure higher rates are here to stay. While there have been times in the past that the US capital markets have ignored rising rates, I say this time is different because now our multi-trillion dollar deficits raise the specter of rates rising higher at an alarming rate, And remember, we are now in uncharted waters in this debt cycle. How long will outright Fed monetization be tolerated? That’s the #1 question in 2011 for the US markets I believe. The beloved Bernanke Put is not your Daddy’s Greenspan Put on the markets.

It’s really more like the Bernanke Naked Put that exposes today’s young adults (Gen X&Y) to the perils of super-cycle debt. It works just fine until the ponzi is exposed for all to see. Unlike the Greenspan Put, the Bernanke Put is subject to the final stages of a long-term credit cycles whose excesses today are at their peak. So In the context of super-cycle economics as I see them, the present generation of young adults are the ones with the most to lose. The youngest amongst us will fare better, as they will be entering into some of the best economic super-cycle periods when they grow up. By then, the fallacy that there are no economic super-cycles will be a thing of the past. Yet it may be all too real for today’s young adults who may find themselves caught in the crosshairs of generational politics. They may suffer unless they are well acquainted with super-cycle economics.

So before us in 2011 is what I characterized in a previous blog as the heavyweight fight of our lifetime- the Fed and the US Treasury vs. the Kondratieff Winter. Back and forth they will go in 2011. Expect knockdowns on each side. In fact today some would say the KW is on its back. But starting tomorrow, a pretty nice reversal should begin with the news of Job’s leave at Apple Computer combined with a seriously overbought market reflecting a beautiful five wave completion since early September. But as I guessed in mid- December, the bulls still have some fight left and I don’t think for a minute that the bulls won’t come back this spring.

This year should be quite eventful and pivotal as the inflation asset express train that doesn’t stop for red lights runs out of steam into the deflationary forces brewing just below the surface that have been for so long accruing and percolating in a subtle but tenacious fashion. We’ll see once and for all in 2011 if these debt levels really do matter- or not. Our theory says they do, and until I see evidence that rebukes centuries of empirical evidence of super-cycle boom and bust, I refuse to believe this debt super-cycle, the largest ever thirty-fold, will just slip away into the night without serious recourse. The K-Wave theory hold that these excesses must be rid- or else. Thankfully, debt levels have risen lately to a level sufficient or render judgment soon on this wacky theory once and for all. DO economic super-cycles matter? We will see for sure in 2011.

A Tale of Two Cities, Now More Than Ever

In recent weeks the markets have weathered an overdue correction at the end of November and have reached  multi-year highs as I surmised in my last post. Yet the Dow Industrials failed to take out the 2010 high made on November 5th, and this divergence may be seen as a bearish indicator for the near term. And the 1250 level on the S&P just ahead is a formidable resistance level I don’t expect to be taken out right away.

It appears that present market levels have forward priced much of the good vibrations out there such as Bush tax cut extensions, 0% interest rates for our lifetime, QE 3,4,5.. etc. and not whay may be foreboding.  These levels assume that some challenges to sustaining growth just won’t occur. These include assumptions that interest rates can’t rise if the Fed is buying treasuries,  deficits just don’t matter, geopolitical risks are intangible, the growing Euro contagion will dissipate, and that commodity inflation won’t materially impact corporate profits or consumer behavior. I doubt the markets will escape the wrath of some of these threats.

Yet global stock markets worldwide forged higher with glaring disparities evident in their relative strength.  US  market averages get an asterisk from such anemic volume coming in large part from the refusal of the retail investor to take the bait and drink the proverbial cool-aid.  Net mutual fund flows for stocks have declined now for 31 consecutive weeks since the May 6th flash crash, and I see that as a compelling “tell” on the state of these markets. It’s clear to most that that the advance from the summer lows has been driven almost completely by a combination of  asset managers who have been forced into the rally late to catch up to the benchmark returns (or be fired) and HFT fund flows that have a time span of a conviction to own stocks that can be measured in nanoseconds.. With the Mercury retrograde and the heavy resistance at 1250 upon us, I suspect that maintaining this advance ahead of earnings season will be pretty tough.

So I am  bearish near term but still respect the theme of this reckless asset inflation express train that doesn’t stop for red lights and still has some momentum. But it does face a date of destiny with the gods of the Kondratieff cycle sometime in our near future. In the past, I would have said 1250 is the brick wall that can’t be broken, but my blogs of the past month or two invoke a pattern of further pricing disconnect in the short therm ( one month to one year) that will precede the culmination of the end game so to speak of a deflationary asset bubble occurring thereafter. The human will of reigning central bankers has made a fait accompli  decision for all us us through their policy decisions  of  invoking unlimited application of electronic credit by fiat that has become the law of the land all over the “civilized” world. So what does this mean for all of us? My take is a tale of two cities.

To some, these are the best of times. To most, they are not, and the divergence has never been greater nor the extremes. Perhaps only Dickens could relish and appreciate the modern and confounding world of global finance for what it appears to be- a sobering reflection a two-headed Jannes archetype quite mystifying to most observers.

So why with the pithy quotes and provocative metaphors? I guess it’s comes from the raw and vexing disconnect I see growing each day between the deteriorating reality on the ground and the headlines leading the global markets forward. Hard to say where to begin, but let’s try to parse the core themes of this disconnect playing out before us that color the capital markets so dyslexic to providing meaningful price discovery. Here are some prime examples:

The Euro contagion hits critical mass, yet most market indexes rose recently to multi-year highs on reports that the US would backstop the EU’s ever-expanding bailout of troubled Eurozone countries. But does anyone really believe this plan will have a chance two years after bond vigilantes called Hank Paulsen’s bluff on his threatened “pocket bazooka” that was unmasked as a water pistol?  The smart money bid up the credit default swaps of distressed credits knowing, and also salivating, that  Paulsen’s proverbial bazooka was just a paper tiger and those vigilantes weren’t about to let Paulsen off the hook with a bluff. So in 2008 credit default swaps of risky credits’s blew out shortly thereafter, and with it the bluff of  any potential threat of  a proverbial sovereign “bazooka. You would think. The present market seems to have lost sight of Hank Paulsen on his knees before Nancy Pelosi begging for the Congressional fiat decree for the crime of the century in 2008.

But with the recent bailout of Irish banks the EU has taken this bait and now we have déjà vu now on the bazooka bluff. Are investors nuts? Is there anything real in this world? Bernanke confirmed on a Sixty Minutes that further debt monetization beyond the stated $600 billion was possible (likely) methinks he was forgetting that he and Geithner swore before Congress in 2008 that they would never monetize the Treasury debt. Through QE2 they have are subject to inquiries about perjury if anyone in Congress had a spine. But for now let’s just call their statements out for their contradictions to their actions. These actions and policy directives of the EU and the Fed reveal a new breed of riverboat gamblers hell bent on doubling or tripling down on their bets to overcome the structural conflict of their allegiances.  Thus through such a rigid dogma they’ve become so  hard wired  over the years to only one way off the reservation- credit expansion with no table limit and all the markers they need from the American public. But don’t lose sight of who is really the house here- the gambler, not the casino (US citizens). It’s all bad  when the gamblers rule the casino or the inmates rule the prisons or the hacks rule the public.

I have put forth the danger of the Fed’s close-minded strategy in the original material put on this site in the late summer of 2007. The core theme at the outset then was that the Fed and other central banks are structurally flawed in that they are hard wired to the Keynesian and monetary schools of thought and aren’t flexible in considering any path of policy directives diametrically opposed to their dogmatic, orthodoxy no matter how things were to play out. What we have now before us perhaps is some version of the nuclear option being played out in front of our very eyes in a slow motion train wreck that most won’t see until its too late. How many gamblers do you know have gotten out of a fix by doubling and tripling down on a bet? History shows that fools and gamblers only learn when they change their mindset and behavior, not the audacity on what they will risk. Of course the Fed and the EU are gambling with the future liabilities of others, not their own money, so it’s quite believable that they could such a colossal risk to overcome what will be seen one day as severely misdirected policy directives by those in power.

2) Now in 2010, some thirty years into a globalization trend that has proven beyond doubt that any notion of “decoupling”  between global markets now more connected than ever investors still cling to hopes that the US can be removed from from the mess in the Eurozone even though the EU is our largest trading partner. But take note of this- the prices of credit default swaps on sovereign debt from the leading EU members Germany and France spiked higher last week for the first time in years, indicating the perceived buffer zone between the PIGS countries and other more stable EU members isn’t what it seems. They hold much of the toxic debt of Greece, Ireland, etc. and look no further than the plunge of over 35% of the Deutche  Bank and, the largest bank in Germany (and Europe) since late summer to give credence to the theme that even the strongest economies are exposed to the Euro debt contagion more than we know. And since my last blog, the equivalent of the Pentagon Papers of Wall St was released yet no one cared because the mainstream financial press buried it, and how. This report came from the Fed itself after some 22 months of determined legal posturing to prevent it We now see why, because the details that were released by the Fed concerning the 208 financial crisis were just simply mind- boggling in exposing the truly wicked scope of global banking powerhouses in the 21st century. As telling as it was, it was even more putrid than watching sausage made.

3) US government bonds are yielding a tiny fraction of the true rate of inflation. Why don’t investors demand more than a puny half a percent yield for a two year Treasury bond now priced close to its all-time high? Let’s see if I have this right- the credit source, the US government who just announced an all-time record deficit of over $150 billion for the month of November, can somehow get away with issuing the cheapest debt ever priced in the history of the capital markets?  It’s even more bewildering when you consider that US govt debt is being rolled over in ever short maturities and  College textbooks in economics of the next generation will just have to label this period with one enormous asterisk. Bond deflation is now hitting full stride that could lead to a mean reversion of the lowest interest rates over the longest period in our history..

So the bottom line on the outlook for economic prosperity and the capital markets is as cloudy as ever despite the substantial levels of debt induced assistance that was held out to be essential to our prosperity. I chuckle at the notion that virtual debt can lift nations to higher prosperity just from the obvious question it poses- if this is so great, why didn’t we just start a $600 billion QE scheme in 1971 when the world allowed us to issue debt without any backing of substance. Why did we wait this long to see the light of such a panacea? Because if you were to believe the Keynesian camp and the monetarist club dogma that a centrally planned and controlled economy in the US was not only possible but essential for our well being and survival you would be forced to ask them why they didn’t enact this brilliant scheme earlier.  Do virtuous ideals of balance, moderation, and sustainability, etc. even matter anymore? Such is the delirium to be found at the tail end of a credit cycle now overextended for many years. Yet the cotton is still high and bullish sentiment in equities is peaking right along with the highest levels of debt ever seen on record.

I can recall reading about only one other such period in global finance- the bubble years preceding the meltdown of the South Seas Bubble and the Mississippi Scheme in 1719. In the few short years preceding these bubbles, more paper fiat currency was printed than in all the years of human history to that time. Sound familiar? Remember this fact- since the global credit crisis commenced in the summer of 2007, more total debt and more junk debt has been issued that in any other period in history. Lots of paper was also being issued in the early 18th century, and in these periods illusions of grandeur can be cloaked in plain sight that can incubate some of the vexing conundrums stated above.

This backdrop and other conditions mentioned above allows me to hold that the most prolific stage of this winter cycle is still before us despite near uniform conviction to the contrary by most everyone except the so-called die-hard bears. But I just can’t shake this idea that this is the equivalent of  conditions on the eve of the spectacular crash of 1719. Go check out what really happened in 1719 in the search engines under South Seas Bubble and see if you don’t get the same hunch. Prechter’s wave count supports this parallel and so does the Kondratieff theory in that it demands that a great portion of the excesses from the previous credit cycles must be removed before the next true growth cycle can begin anew yet this has not come to pass. So I’m very intrigued at the parallels of these two periods and will be sure to add more content in the coming months to give our readers more isight into comparing these two fascinating periods of global finance. Both periods share some key attributes that make then look more alike to me each day- namely that they are twin tower bookends at the tail end of economic grand super-cycles that each fostered the greatest utility of fiat currency to date in world history.

My gut tells me that an oops! moment is on the horizon. This oops! moment is the realization by the collective consciousness of market participants that debt does matter, for if deficits do matter then all bets are off. Throw out conventional analysis if such a moment were to occur, because the paradigm shift coming from this tipping point would render any assumptions of past cause-effect conditions utterly worthless. I have attached here below today’s blog from my favorite source of Elliott Wave analysis- danerics elliot wave blogspot- and I concur with his market call of a rising yield deflationary collapse on the horizon. It makes perfect sense to me since higher yields are the real weapons of mass destruction- they choke off growth, destroy wealth of anyone  owning low yielding debt (nearly every bondholder today), and ultimately trigger default on scores of securities across the spectrum.

Don’t look now, but rates all along the Treasury curve are exploding higher and there’s nothing the Fed  can do about it. Given the factual data of all the  debt rollovers coming due in the coming 24 months (some $14 trillion in MBS, CRE, leveraged loans, junk bonds, and Treasury debt) it’s likely that market speculators will forward price this once that perception has taken hold.  Once this asset inflation express train makes its final stop, the futility of debt induced stimulus as a solution to fending off a Kondratieff Winter will be all too real. So perhaps more intriguing in the coming months than looking at the Dow, the S&P, gold, or even the dollar will be monitoring interest rates Treasury debt to see if yields are rising all all across the curve. Daneric’s blog proposes a radical idea not being discussed much- that the 30 yr Treasury yields will lead all other yields higher and flattening the curve higher.  This could serve to ignite a Kondratieff Winter through the trillions in securities betting against such a surprise spike in rates.  Yet this debt deflation has already begun as all Treasury yields have spiked higher since QE 2 was announced. That was not supposed to happen if the Fed was buying these bonds, right?  Yet yields are rising  because Wall St., Congress, and so many have overlooked the deficit thresholds the debt markets could bear. And the irony of President Clinton’s impromptu press conference Friday can’t be overlooked.  Here, he was arguing for the extension of Bush tax cuts which would take our deficits into hyper-drive yet it was his savvy and courage in securing the tax increases of late 1993 that settled rates down and provided the stability for the greatest economic and market boom in all of history. Was his speech Friday the bookend of the 1993 event that got the bull market rolling thereafter?

Everyone would agree there is no rising yield deflationary collapse is priced into the markets at present, but should there be? Read the Daneric blog below and see for yourself.

A Tale of Two Cities, Now More Than Ever

In recent weeks the markets have weathered an overdue correction at the end of November and have reached  multi-year highs as I surmised in my last post. Yet the Dow Industrials failed to take out the 2010 high made on November 5th, and this divergence may be seen as a bearish indicator for the near term. And the 1250 level on the S&P just ahead is a formidable resistance level I don’t expect to be taken out right away.

It appears that present market levels have forward priced much of the good vibrations out there such as Bush tax cut extensions, 0% interest rates for our lifetime, QE 3,4,5.. etc. and not why may be foreboding.  These levels assume that some challenges to sustaining growth just won’t occur. These include assumptions that interest rates can’t rise if the Fed is buying treasuries,  deficits just don’t matter, geopolitical risks are intangible, the growing Euro contagion will dissipate, and that commodity inflation won’t materially impact corporate profits or consumer behavior. I doubt the markets will escape the wrath of some of these threats.

Yet global stock markets worldwide forged higher with glaring disparities evident in their relative strength.  US  market averages get an asterisk from such anemic volume coming in large part from the refusal of the retail investor to take the bait and drink the proverbial cool-aid.  Net mutual fund flows for stocks have declined now for 31 consecutive weeks since the May 6th flash crash, and I see that as a compelling “tell” on the state of these markets. It’s clear to most that that the advance from the summer lows has been driven almost completely by a combination of  asset managers who have been forced into the rally late to catch up to the benchmark returns (or be fired) and HFT fund flows that have a time span of a conviction to own stocks that can be measured in nanoseconds.. With the Mercury retrograde and the heavy resistance at 1250 upon us, I suspect that maintaining this advance ahead of earnings season will be pretty tough.

So I am  bearish near term but still respect the intermediate theme of this reckless asset inflation express train that doesn’t stop for red lights and still has some momentum. But it does face a date of destiny with the gods of the Kondratieff cycle sometime in our near future. In the past, I would have said 1250 is the brick wall that can’t be broken, but my blogs of the past month or two invoke a pattern of further pricing disconnect in the short therm ( one month to one year) that will precede the culmination of the end game so to speak of a deflationary asset bubble occurring thereafter. The human will of reigning central bankers has made a fait accompli  decision for all us us through their policy decisions  of  invoking unlimited application of electronic credit by fiat that has become the law of the land all over the “civilized” world. So what does this mean for all of us? My take is a tale of two cities.

To some, these are the best of times. To most, they are not, and the divergence has never been greater nor the extremes. Perhaps only Dickens could relish and appreciate the modern and confounding world of global finance for what it appears to be- a sobering reflection a two-headed Jannes archetype quite mystifying to most observers.

So why with the pithy quotes and provocative metaphors? I guess it’s comes from the raw and vexing disconnect I see growing each day between the deteriorating reality on the ground and the headlines leading the global markets forward. Hard to say where to begin, but let’s try to parse the core themes of this disconnect playing out before us that color the capital markets so dyslexic to providing meaningful price discovery. Here are some prime examples:

The Euro contagion hits critical mass, yet most market indexes rose recently to multi-year highs on reports that the US would backstop the EU’s ever-expanding bailout of troubled Eurozone countries. But does anyone really believe this plan will have a chance two years after bond vigilantes called Hank Paulsen’s bluff on his threatened “pocket bazooka” that was unmasked as a water pistol?  The smart money bid up the credit default swaps of distressed credits knowing, and also salivating, that  Paulsen’s proverbial bazooka was just a paper tiger and those vigilantes weren’t about to let Paulsen off the hook with a bluff. So in 2008 credit default swaps of risky credits’s blew out shortly thereafter, and with it the bluff of  any potential threat of  a proverbial sovereign “bazooka. You would think. The present market seems to have lost sight of Hank Paulsen on his knees before Nancy Pelosi begging for the Congressional fiat decree for the crime of the century in 2008.

But with the recent bailout of Irish banks the EU has taken this bait and now we have déjà vu now on the bazooka bluff. Are investors nuts? Is there anything real in this world? Bernanke confirmed on a Sixty Minutes that further debt monetization beyond the stated $600 billion was possible (likely) methinks he was forgetting that he and Geithner swore before Congress in 2008 that they would never monetize the Treasury debt. Through QE2 they have are subject to inquiries about perjury if anyone in Congress had a spine. But for now let’s just call their statements out for their contradictions to their actions. These actions and policy directives of the EU and the Fed reveal a new breed of riverboat gamblers hell bent on doubling or tripling down on their bets to overcome the structural conflict of their allegiances.  Thus through such a rigid dogma they’ve become so  hard wired  over the years to only one way off the reservation- credit expansion with no table limit and all the markers they need from the American public. But don’t lose sight of who is really the house here- the gambler, not the casino (US citizens). It’s all bad  when the gamblers rule the casino or the inmates rule the prisons or the hacks rule the public.

I have put forth the danger of the Fed’s close-minded strategy in the original material put on this site in the late summer of 2007. The core theme at the outset then was that the Fed and other central banks are structurally flawed in that they are hard wired to the Keynesian and monetary schools of thought and aren’t flexible in considering any path of policy directives diametrically opposed to their dogmatic, orthodoxy no matter how things were to play out. What we have now before us perhaps is some version of the nuclear option being played out in front of our very eyes in a slow motion train wreck that most won’t see until its too late. How many gamblers do you know have gotten out of a fix by doubling and tripling down on a bet? History shows that fools and gamblers only learn when they change their mindset and behavior, not the audacity on what they will risk. Of course the Fed and the EU are gambling with the future liabilities of others, not their own money, so it’s quite believable that they could such a colossal risk to overcome what will be seen one day as severely misdirected policy directives by those in power.

2) Now in 2010, some thirty years into a globalization trend that has proven beyond doubt that any notion of “decoupling”  between global markets now more connected than ever investors still cling to hopes that the US can be removed from from the mess in the Eurozone even though the EU is our largest trading partner. But take note of this- the prices of credit default swaps on sovereign debt from the leading EU members Germany and France spiked higher last week for the first time in years, indicating the perceived buffer zone between the PIGS countries and other more stable EU members isn’t what it seems. They hold much of the toxic debt of Greece, Ireland, etc. and look no further than the plunge of over 35% of the Deutche  Bank and, the largest bank in Germany (and Europe) since late summer to give credence to the theme that even the strongest economies are exposed to the Euro debt contagion more than we know. And since my last blog, the equivalent of the Pentagon Papers of Wall St was released yet no one cared because the mainstream financial press buried it, and how. This report came from the Fed itself after some 22 months of determined legal posturing to prevent it We now see why, because the details that were released by the Fed concerning the 208 financial crisis were just simply mind- boggling in exposing the truly wicked scope of global banking powerhouses in the 21st century. As telling as it was, it was even more putrid than watching sausage made.

3) US government bonds are yielding a tiny fraction of the true rate of inflation. Why don’t investors demand more than a puny half a percent yield for a two year Treasury bond now priced close to its all-time high? Let’s see if I have this right- the credit source, the US government who just announced an all-time record deficit of over $150 billion for the month of November, can somehow get away with issuing the cheapest debt ever priced in the history of the capital markets?  It’s even more bewildering when you consider that US govt debt is being rolled over in ever short maturities and  College textbooks in economics of the next generation will just have to label this period with one enormous asterisk. Bond deflation is now hitting full stride that could lead to a mean reversion of the lowest debt rates EVER for the longest period EVER thanks mostly to the easy money Fed.

So the bottom line on the outlook for economic prosperity and the capital markets is as cloudy as ever despite the substantial levels of debt induced assistance that was held out to be essential to our prosperity. I chuckle at the notion that virtual debt can lift nations to higher prosperity just from the obvious question it poses- if this is so great, why didn’t we just start a $600 trillion QE scheme in 1971 when the world allowed us to issue debt without any backing of substance. Why did we wait this long to see the light of such a panacea? Because if you were to believe the Keynesian camp and the monetarist club dogma that a centrally planned and controlled economy in the US was not only possible but essential for our well being and survival you would be forced to ask them why they didn’t enact this brilliant scheme earlier. Why have we been forced to accept for so long any sense of limitations when we have been told for so long there are none, none at all?  Why have we all been burdened for so long with idealistic themes of virtues of balance, moderation, and sustainability, etc. as if they never really mattered. Is this not just one sad, cruel joke?  Such is the delirium to be found perhaps at the tail end of a credit cycle that has overextended its welcome by many, many years. Remember, fools abound everywhere.

I can recall reading about only one other such period in global finance- the bubble years preceding the meltdown of the South Seas Bubble and the Mississippi Scheme in 1719. In the few short years preceding these bubbles, more paper fiat currency was printed than in all the years of human history to that time. Sound familiar? Remember this fact- since the global credit crisis commenced in the summer of 2007, more total debt and more junk debt has been issued that in any other period in history. Lots of paper was also being issued in the early 18th century, and in these periods illusions of grandeur can be cloaked in plain sight that can incubate some of the vexing conundrums stated above.

This backdrop and other conditions mentioned above allows me to hold that the most prolific stage of this winter cycle is still before us despite near uniform conviction t the contrary by nearly everyone except the so-called die-hard bears. But I just can’t shake this idea that we may now be living in the equivalent of 1719. Go check out what really happened in 1719 in the search engines under South Seas Bubble and see if you don’t get the same hunch. Prechter’s wave count supports this parallel and so does the Kondratieff theory in that it demands that a great portion of the excesses from the previous credit cycles must be removed before the next true growth cycle can begin anew yet this has not come to pass at present. So I’m very intrigued at the parallels of these two periods and will be sure to add more content in the coming months to give our readers more insight into comparing these two fascinating periods of global finance. They look more alike to me each day.

Yield Creep all along the Treasury Curve, courtesy of the Bond Vigilantes

The tattletale signs of a macho agenda gone wrong were evident the past few days in several key measures in the capital markets. QE 2 was hailed as a pancea, a manna from heaven, a win-win for the markets that would rise no matter if the economy was recovering or not. But the reversal of fortunes evident the past few sessions begs to differ. After all, who outside of any proponent of wave theory would have expected a meaningful rally in the US dollar and a rout in gold, silver and Treasuries all along the curve, even the short end? Or that the S&P is now 2% lower than its level in April?  It just supports our theme that the Fed is no more in control of our economy than the Wizard of Oz. But behind that curtain of theirs, they do have some impact- just the wrong kind.

Global central bankers have usurped sufficient power to give them unfettered seigniorage over nations. Their policies assure that we all pay higher prices for the basic things we need each day and help to prop up most paper assets above their true market clearing levels. Interestingly though, since QE 2 was announced gold is down $80, the dollar is up 2% and interest rates all along the curve are much higher.  The Fed really doesn’t control much other than forcing inflation upon consumers and now many businesses now seeing their margins squeezed from ever higher input prices. There is no free lunch this QE 2 and yet much to reckon with in the fallout of unwinding several trillion in toxic paper in the coming years.
Now that the financial piñata of QE2 has been proclaimed the law of the land with hardly any blowback, we will see if it fares better than the monetization plan that has failed so miserably in Japan over the past 20 years. Will it be sufficient to overcome fourth Kondratieff Winter, now packing some $40 trillion in private debt and $15 trillion of US government debt? And so much of it is coming due very soon. And as we have reported for some time, our Treasury  debt has continued to roll over in recent years in shorter maturities as fewer dare to invest far out on the curve. In fact, since QE2 was put in play in early November, interest rates all along the curve have spike much higher.  Many expected the long end to suffer, but to the chagrin of the Fed shorter maturities have spiked much higher too. This can mean only one thing- the bond vigilantes are back, and that’s not good. This makes more difficult any efforts in the future to refinance our debt at record low yields. Well, we knew these puny yields couldn’t last forever but going forward the interest we must pay on the debt could rise exponentially and is sure to be a greater component of our budget in the years to come.

In my last post when QE2 was announced I stated a belief QE2 had delayed any potential economic winter by several months but that does not preclude the chance there may be a series of very sharp corrections in the interim. In the past week the market has lost over 2% in a much needed correction and there is a chance even we could witness another flash crash if the European PIGS contagion can’t be contained. But the asset inflation express is still in play for now and there is no doubt to me the Fed would actually buy S&P futures instead of Treasury bonds if the market were to drop too much. Therefore I would go long stocks after any flash crash in the near term so long as the S&P didn’t close below its upwardly sloping channel line (around 1080 now) that held several times over the summer when it appeared economic output  was heading for the dreaded double-dip.
The global de-leveraging process is just in the early innings and still so much toxic debt remaining that needs to be written down.  A tipping point could  manifest sometime next year if some major structural changes are not enforced soon. But unless a significant shock occurs in the near term, I still expect the inflation express train to resume soon for a bit longer before giving way to meaningful austerity in western economies sorely in need of deleveraging. The geo-cosmic signatures now prevailing are noted by two predominant traits- grand scale (Jupiter) and recklessness (Mars). That’s why we are in for one heck of rumble here in the months and years ahead.

I refer back to the comments posted here on October 3rd that framed this period as heavyweight prize fight taking place between the Federal Reserve and a looming Kondratieff winter. Give Ben the first two rounds but I suspect a KW counter-punch is coming pretty soon. But the knockout is sure to come later either by the deflationary debt defaults of the K-Winter or through the combination of technological advances and the financial alchemy of the ingenious and crafty Ben Bernanke.  But as this title fight moves to the middle and late rounds let’s remember that mitigating the worst of this winter is entirely possible if sufficient reforms are taken  (i.e. willful debt reduction, austerity, etc).  But lest we forget that no past Kondratieff cycle has ever ended without the removal of the excesses built up over the previous credit cycle. Given the prohibitive levels of debt and recklessness seen in the past 25 years of the present Kondratieff cycle, the rehabilitation from such an epic wave of debt induced growth is sure to be daunting if the political will remains oblivious to the realities underpinning the nature of the Kondratieff  cycle.