Kicking the Kondratieff can down the road – again
Two elections happened last week but only one really mattered. The mid-term elections gave Republican control in the House but that alone doesn’t guarantee real change. The election held by the FOMC the next day does. It means higher prices for the goods and services needed by all Americans and it also means that stock and asset speculation will continue unabated. You can decide for yourselves if this form of change, one very real and tangibly defined, is really beneficial for our nation’s long term welfare. It probably depends on who you ask and I would suspect the results to be even more polarized than the entrenched red state/blue state map in national politics.
The Fed’s decision to further monetize Treasury debt by $600 billion over a few months was amplified with language in the policy statement smacking of arrogance and conviction. Throw in speculation over a potential QE 3 and 4 and you have a green light for stocks and inflation to break out higher soon.
And last week global stock markets surged higher and in fact broke through key technical resistance to suggest a new leg of the rally had begun. And for the first time since the summer of 2008, even I believe equities will rise in the near term, but not in the context of a new bull market. I believe we are about to witness the final push higher in the P2 countertrend rally that began in early March 2009. Below I will outline a case supporting higher prices in the near term and why QE 2,3,4 etc. may only delay the coming winter.
I had expected that by the late summer of 2010 that the US stock market would have broken through their key support levels on the channel line. A few times this year (Feb 8th, July 2, and in late August) the US markets were really on the ropes, clinging to fragile support. Yet each time the S&P index approached the key level of support on the upwardly sloping channel line drawn from the March 2009 lows, the markets bounced off those critical levels that could not be breached. And with this occurring three times in a matter of a few months, the resilience at the critical support line had been proven. So after the third stick save in late August, the few market players left (HFT’s and large institutions primarily) knew it was safe to take the plunge back into equities. And since that past bounce September 1 the markets have surged almost 20% higher in large part to the “Bernanke Put” implied in his late August speech at Jackson Hole suggesting more QE on the way. Despite the weaker economic growth at the time, the markets began their Pay it Forward march higher. The spike we saw last week had all the hallmarks of a relief rally manifesting by virtue that the Holy Trinity of Wall Street wishes had been granted- Megaton QE from Ben, Republican control of the House, and the Obama olive branch on extending the Bush tax cuts.
It’s very tempting for those short the market now to feel more hardened by the impression that the Fed has shot its wad and that nearly all the forces supporting the market have been fully appreciated at these levels. Before the events last week, I was in that camp, and although I still maintain the K-Winter is likely to have a second coming from the 2008 event, I must say to our readers I am convinced it’s not happening anytime soon. First, the technical read suggest a follow-through higher based on the fact that Friday the S&P broke through the April 26 high of 1220, albeit by one point. But with all three indexes now making new 2010 highs and with the Dow Theory confirmed for now with the Dow Transports also making new highs, it’s hard to argue a new uptrend has not been established. We are dealing with one determined bunch these days- the Fed and the mythical Plunge Protection Team determined to goose the markets. It would be a conspiracy thriller if weren’t so transparently obvious.
Further supporting this is the notion that bond investors are getting the memo that the coming years are sure to be the most inflationary since the 1970’s and thus stocks are sure to benefit from increased flows due to asset reallocation from bonds to stocks. This could provide a missing component from the current rally- the retail investor. After all, who wants to be left out of such a great party? I think the policy statement from the Fed this week puts the proverbial fork in the great bond rally from 1981. It’s toast.
But to me perhaps the most compelling reason I found to support that this winter was pushed out a bit was the recent weekly comments from financial astrologer Ray Merriman at www.mmacycles.com. I have grown ever more fond of his work for one simple reason- his forecasts over the 8-9 months I have followed him have proven not only to be the most accurate, but also the most nimble in these extraordinary times. He’s been able to thread the needle in a very tough environment to forecast. I have come to appreciate this component of financial forecasting more than ever in 2010 and wish I had subscribed to his service sooner. His comments on November 5th were intriguing, insightful and colorful. His forecast indicates that the astrological forces influencing equities now term suggest prices to continue to rise.
He cites two conjunctions that will continue to exert a prevailing influence on stocks, and for that matter most asset classes except bonds. First, he cites the Jupiter and Uranus conjunction he calls the “Get Out of My Way Asset Inflation Express” because of its no holds barred aspects. Together with the “I Don’t Stop For Red Lights” nature of the Mars in Sagitarius conjunction, the prevailing astrological forces at present suggest a theme that could be best regarded as “Damn the Torpedoes, full-steam ahead!”
Some out there call this approach “Don’t fight the Fed”, but I don’t believe in that one-size-fits-all moniker. One of the most recent pieces found on the EW site proves that such a mantra was futile in 2008 when the Fed was promising a new program each day to battle old man K Winter and each one proved futile in keeping stocks from plunging. That’s why I have come to believe that the most influential factors that impact the capital markets are born from the forces exerted from the cosmos and what Dr. Carl Calleman refers to as the Cosmic Tree of Life (see Mayan Section for more). The track record of these influences on market direction is formidable when compared to simple slogan’s like “Don’t fight the Fed”. They imply that while this at times may be true, the higher truth is that there could be something else entirely steering this ship. I suspect that this may be the case now and could explain why the markets are rising in spite of an ever growing debt bubble that becomes more problematic with each wink and nod that comes after every new round of QE by the central bankers of the world. We know full well much of the rally isn’t from through traditional price discovery, but who cares when we’re having so much fun, right?
Whether this rally can be sustained to render the gains from March 2009 as a bull market instead of a well extended bear market counter trend rally may depend upon if and how well the US government and our people will choose to make the difficult changes needed to restore our prosperity. Much of the western world suffering from the fool’s game of leverage have come to their senses and are in the early to mid stages of painful austerity programs sure to stabilize their floundering ships. But the US seems hard wired by nature to embrace deficit spending and we are way behind the curve here. A profound change in our attitude must occur soon, and perhaps it has roots with the election of so many Tea Party candidates who promised to reign in the runaway deficits. Even though there is little evidence to date in past mid-terms that these “so-called” real changes are soon forthcoming (an end to partisan bickering, runaway spending, etc.) there is a brief window for change now that a bunch of determined upstarts have made their way to Congress. Perhaps their energy and the recent stability evident in our economy will enable us to act now to alleviate any possible second act of the K-Winter. We established in the Jubilee icon of the K-Wave section that so long as we embraced the principles of this divine cycle we could prevent any economic winter, and we still can if we are so inclined.
Big Ben to K-Winter: Let’s get READY TO RUMMMMMMBLE!
The message from the Fed’s last policy statement set the stage for the most
sensational prizefight of our time, and the stakes are higher than we know.
In one corner, it’s the reigning champ- Ben Bernanke, the unflappable czar
reigning over the global monetary monarchy. Nickname: “Helicopter Ben”.
Recent accolades: Time Man of the Year 2009. In the other corner- his arch
enemy, the one he refuses to call by name- the Kondratieff Winter. KW has
no nickname, and while his accolades are more formidable they are too far
removed for anyone alive to remember (this by design, of course). Both are
determined and in peak form but only one can prevail and it is sure to be by
knockout. Both share just one thing-their date with destiny has now arrived.
So why all the build-up? Because the proverbial gauntlet was thrown down
by Ben and the Fed at their last meeting. They left no doubt they stand ready
to unleash monetary nuclear warfare at the slightest hint of slowing growth.
But there’s another big reason the Fed is wielding their QE bazooka again-
they know full well the threat that K-Winter’s deflationary forces are reaching
a critical mass that could jeopardize such a fragile recovery. In one part of
the policy statement, he alluded to the threat of certain conditions that are
by axiom deflationary without calling them so, instead choosing to carefully
parse that section of the statement.
This underscores the true enigma of any deflationary Kondratieff Winter-
those like Bernanke who understand it deny its threat through a conviction it
can be overcome by brute force while the general public remains oblivious to
its very existence. And why not? Nothing about the Kondratieff Wave is ever
discussed by the mainstream financial press, so the public remains ignorant
about the significance of long-wave credit cycles until it’s too late. But you
can be darn sure the Fed is quite attuned to its potent force and likely why
they refuse to address it or acknowledge it. And why should they? No one in
the financial press has taken them to task on it.
So here’s the rub- the investing public believes the Fed is taking all of these
draconian measures to spur growth yet we all know the limitations of Fed
policy to induce credit expansion. It’s just not happening folks. They know
this but choose the radical QE route because they are for the short term
more concerned about maintaining asset price stability, even at levels far
above the equilibrium clearing price. Why? Because although they are quite
aware of the implications underlying the K-Wave theory, they are still sure
they can defeat mother nature through extending credit ad infinitum to the
point where the next cycle of economic growth can overcome the potential
detriment inherent with debt levels so high. But the arithmetic is just not on
their side because at present the excesses to be removed from the system
are just too prohibitive.
It seems a tipping point is soon at hand that will allow investors to see
what Prechter and the Austrian school have advocated- you can’t overcome
a deflationary asset bubble with a credit-cased system. Credit has its
limitations, it is not the magic elixir the Fed would have you believe. The
sooner investors can see this for themselves the better or else they will
encounter first hand the perils of their own “Minsky Moment”. (I have added
a small piece on this below). In the meantime however, we are in the twilight
of the Fed’s influence and I expect the period from now until their demise will
seem like the Twilight Zone to us.
In my last blog on the eve of the fateful Fed meeting in September, I mused
that the results of that election (a handful of Fed governors and Bernanke)
may possibly impact the average US citizen more than the elections in early
November. What transpired after the Fed’s “election day” was a mad, insane
rush from all major central banks around the worlds to race to devalue their
own currency. This election produced real results (bad) right away versus
the November elections which aren’t likely produce anything meaningful in
the short term due to more Congressional gridlock. That’s a far cry from the
manic and surreal developments resulting from this “election” which has
set the stage for so many dubious new all-time records to fall. Gold makes
new all-time highs every new day and Treasury bonds keep setting record
low yields, record high prices, and record bid to cover ratios at each of the
Treasury auctions this week. Ho hum, just another boring week of parabolic
extremes in the capital markets. The Fed’s “election” DID matter.
And we can expect more of the same in the coming weeks and months. In
fact, I am bracing for a “high-noon” melodrama that will redefine surreal.
Why? Because Big Ben knows that the first round of QE together will all
the fiscal bailouts have proven insufficient to restore growth and he must
send the strongest message possible to the markets that he will stop at
nothing to defeat deflation, even if he really can’t. Oh but try he will. Just
before the last Fed meeting, financial astrologer Ray Merriman was sure he
would step on the gas given that his natal astrology make-up indicated he
was inclined to do so. Never mind the calm and cool persona, Bernanke is
the “all-in” warrior with no apologies. Give him his due, he is no phony. This
combat is what he signed up for, so don’t expect he won’t err on the side
of being too aggressive. Knowing this, and also knowing full well the power
and might of this huge deflationary debt bubble, we can expect an epic
prizefight to unfold in the near term. Buckle up my friends for a very wild
ride.
The first round goes to Big Ben. In September stocks went up about 10%in
large part because the Fed jammed tens of billions of US Treasuries down
the throats of their primary dealers to induce them to speculate across the
spectrum, sending the Netflixes and Pricelines of the world soaring into the
stratosphere much like Ariba in the spring of 2000. Such parabolic moves
usually precede a top and a nasty reversal. How may this play out? My belief
is through a short squeeze on the US Dollar given the present groupthink
at 95% bears on the USD. I do expect the final and decisive rounds of this
prizefight to go old man K-Winter. Many of the tell-tale events and conditions
that occur at market tops that were mentioned before on this site have now
come to pass in recent weeks and months to set the stage for the final act
(P3).
Some of these are:
Exhibit A: Checklist of Conditions Marking a Secular Top:
The world’s largest IPO just closed (Petrobras, just weeks after China AG)
The US govt would claim victory over the bailout decisions re Citi, AIG and
GM through pawing these toxic credits back to the US public. The US has
been dumping toxic billions of shares of Citi in the public market for months,
the GM IPO is weeks away, and AIG hints at getting Uncle Sam off it’s back
with the plan announced Friday. Yet in each of these cases, we taxpayers
are still stuck with tens of billions in write-downs of each.
Tallest building in the world opens same year- Dubai 2010 (Think Empire
State 1931)
Trade War Rhetoric at fever pitch (think Smoot Hawley 1931)
Wall St Movie released reflecting our obsession with material wishes even
while our markets crash around the same time (1987). Don’t laugh- this one is
all about bubbles and clearly suggests the biggest one is yet to come.
Insanity rule prevails- fix old problems with same thing that created original
problem- more debt and credit to fix a crisis caused by the same thing.
Parabolic moves in Netflix and PCLN ala Ariba, Pets.com etc. in 2000
Obama declares a Depression was averted, govt declares end of recession
Investors show insatiable demand for junk paper in mad dash for high-yield
Four flash-crashes alone in the past week in individual stocks (Nucor, etc)
Recently reported massive imbalance of insider selling to insider buying
I could go on and on, but what’s the point. The market momentum is likely to
soon run its course and leave a vacuum of buyers behind. The current period
marking cognitive dissonance is sure to be replaced by a herd averse to this
madness. Mutual fund outflows decreased for the 21stconsecutive week and
yet we are at multi-month highs. So look out soon for a catalyst that could
trigger another mass sell decision by investors tired of playing this game.
Never Mind November 2nd- the Election Day that Matters is September 21, 2010
The fuss over the November elections is now approaching a full fever pitch, yet there’s another election this fall that may prove to be more crucial. It will be made in two days by an electorate of less than a dozen of our citizens yet it could possibly impact the lives of most Americans more directly than the outcome of the November mid-term elections. This election has been announced yet has no advertising, campaign slogan, or rallies. This election occurs on a regular basis about 9 times each year, usually without tremendous fanfare. But not the one Tuesday.
At 2:15 EST September 21, 2010 the Fed will release its policy statement and we will know then if they intend to ramp up QE 2.0 or pull back. At their last meeting August 9th, the language was particularly disturbing and caught the markets off guard and for three weeks the market slid on fears the recovery had stalled. But Since the beginning of September, the risk trade was turned
on again in large part to the Fed’s frequent injections of liquidity in the markets through their Permanent Open Market Operations program (POMO) further goosing the markets. But if the recovery is so stable, why the need for such a draconian approach as monetizing our own debt? Such a policy shamelessly sanctions a Ponzi scheme that hides in plain sight, one that dares you to call them out on it. I do feel Helicopter Ben is bold enough to throw the printing presses into overdrive, I feel there is now too much dissention within the Fed to allow him to pull such a dangerous lever, especially this close to the November elections. After all, the Fed is supposed to at least appear neutral to political pressure. The end game of QE gone mad is probably set for 2011 when the fallout of the bursting of the deflationary asset bubble is at its fever pitch. Then he will have all the cover he needs to awaken the Frankenstein of hyper-inflationary measures.
But of course, Ben could throw down the gauntlet Tuesday and opt for more QE under the cover of perceived low inflation and the recent approval of Basle III which allows banks up to 8 years to get their capital ratios in order (what a farce). If he dares to do this, the markets could well break out and rally to 1150 or a bit higher before the damage incurred to interest rates and
commodity inflation threaten the recovery. This would represent a blow-off top much like the NASDAQ in March of 200 or gold in the final days of 1979. This would be an exhaustive climax rally that would have sucked in as many bulls as possible and cause most of the shorts to cover. Then sentiment would peak as nearly everyone would believe that a new bull market had really arrived.
Such a scenario would be the ideal set-up for the dreaded Primary Wave three to take hold and trigger a “mass sell decision” point that would cause the S&P to break support and fall below 1000. Gold and silver would follow suit, rallying with stocks then reversing together. The dollar would first plunge on news of QE but then rally once the risk trade was removed. So the US dollar is really the key here because the Kondratieff Winter scenario and Elliott Wave models both are based on a theme of deflation coming from a contraction of credit through an acceleration in debt defaults across the spectrum. For this to take shape, the dollar, measured by the US Dollar Index
must hold support at around the 80 level (it’s at 81.30 tonight). A severe break under this level would suggest that inflationary forces would prevail in the short term, and in that scenario stocks would rise despite the tens of trillions of debt compounding all over the world. So therefore I am watching the US Dollar index with heightened scrutiny in the short term for signs of the direction of the pivot that is implied within the present technical and fundamental backdrop.
Or the Fed may signal an end to the QE ramp through the cover that there was ample evidence to support that the economy had stabilized enough since the last meeting to render liquidity injections each week as unwarranted. If this is the case, look for the markets to sell off hard and fast Tuesday because expectations of QE are already priced into the market. This week marks also
some very intriguing and powerful geo-cosmic signatures that suggest severe reversals are very possible. For more on this I urge our readers to each week read the upcoming weekly comments from Ray Merriman at www.mmacycles.com. Without a doubt, we are in for a rollercoaster ride this week that may impact the market’s direction for some time to come. Events could signal a pivot from deflation to inflation as the primary driver of market forces if QE is extended or they could also trigger the mass sell decision point referred to above. Below I have added some new material supporting why I feel although there may be a false break-out this week, the most likely outcome is a powerful sell-off featuring the hallmarks of a K- Winter- debt, default and deflation.
A multitude of signs now suggest major market reversals soon in the US markets and this is well supported by the abundance of content on our site relating to the K-Wave, the Elliott Wave, the impact of the present reigning astrology ,etc. But today I wish to introduce another key metric suggesting a Kondratieff Winter is looming- the FX markets.
The fx markets indicate a major structural shift in place that will shatter the so-called “risk trade” to pieces. Meaningful trend shifts in the fx markets have been in place throughout much of 2010 that haven’t gotten a morsel of attention from the mainstream financial press. But today we have added two links to help or readers sort out what’s coming from these developments.
One is www.fxsteeet.com, a site with comprehensive content on the currency markets that has recently featured our material on their site for educational purposes. The other is www.the yenguy.wordpress.com, a financial blog I feel is among these best I have ever seen in framing the “big picture” linking the global currency, debt, and equity markets. Their analysis makes sense of these complex and dynamic markets through a too that doesn’t lend itself to
manipulation- the carry trade.
Until I sorted through this material I never imagined how any tool could frame the prevailing condition so concisely and without fanfare. He integrates the nuances of the various carry trade currency pairs (AUD/JPY, EUR/JPY, etc) within the framework of the Elliott Wave and K-Wave paradigm. We all know that everywhere asset allocation is influenced by these carry trade pairs yet the mainstream financial press rarely addresses these crucial relationships that define the ebb and flow of risk capital throughout the global markets. I have attached below the comments of the blog as they relate to the onset of the Kondratieff Winter below. Here’s a recap of the key dates in 2010 when changes in the carry trade preceded turns in the markets:
April 10, 2010- K- Winter Debt deflation arrives to the US stock market- the peak is in
The fx markets pivoted dramatically and determined the Euro had peaked. Fx markets sniffed out the trouble brewing with the European sovereign debt crisis before the equity or debt markets. The US market continued to rise for the next two weeks, peaking on April 26 before the realization had set in that a global sovereign debt crisis had arrived. The US market peaked on that date and is now still down over 5% from those highs despite the recent rally. The yen begins a spectacular rally that will see it make all-time highs vs the Euro and multi-decade highs vs. the US Dollar.
August 11, 2010- The yield curve flattens after Bernancke’s policy statement
Investors in government bonds of all maturities scream foul at the Fed’s policy statement indicating a policy reversal opting for more quantitative easing. This fateful decision caught the markets off guard in that they wondered out loud if the Fed was aware of something (negative) the market’s weren’t. The US stock market sold off hard for three weeks and for the first time since the financial crisis began Treasury bond yield moved higher during a period of undeniable erosion in economic activity. The considerable flattening of the yield curve can mean that investors have begun to distrust sovereign debt, even from the US.
September 1, 2010- K-Winter debt deflation arrives to the US Treasury market- the peak is in
Bonds (TLT) peak as debt deflation comes to the bond market. Currency trends explode that aren’t so subtle. The Euro makes all-time lows against the Swiss France and the AUD/JPY carry trade implodes and the yen soars to new heights against most major currencies. What is this in fx telling us? That there is now a bi-polar global currency dynamic now emerging, and it calls
for investors to know what end is up in fx because these trends have preceded larger moves in the stock and bond markets.
So then, when will this tipping point finally come to pass? Certainly there are many who are support the K-Winter theme that may be a bit frustrated it has yet to arrive in full force, but news on the ground indicates it won’t be long. This beast is being battled by the forces seeking to maintain the status quo (Washington, Wall St, Federal Reserve, ECB, etc.). But their efforts are now suffering from the law of diminishing returns because their objectives are not being met despite the most desperate attempts imaginable. This is the real game-changer because this truth is now slowly but surely becoming embedded into our collective psyche. We are now seeing for ourselves just how impotent that wizard behind the curtain really is. All of the content above, especially the Elliott Wave technical read, suggests that the markets are likely to encounter another serious inflection point that may trigger the “tipping point “ condition Robert Prechter has forecasted that will be unlike any other in history. This condition would be the rarest of breeds in that most investors along the spectrum would for once all agree there was no reason to own stocks.
Ironically, this is unlikely to occur until there is first widespread optimism for stocks by a great number of investors, as is the case today. Yet that wasn’t the case in mid-August or late June when the markets came so close to breaking key technical support levels. So how were the bulls able to hold their ground each time over the summer? Well they certainly benefited from the extremely low volume that proved t be far lower than typical summer months. So it wasn’t too hard for those forces to hold at those key technical levels so long as the economic news was just awful but not horrific. For the time being it has been just simply awful but not so horrific for capitulation. It will be interesting to see how the ever deflating economic news is greeted by a market that is finally back in full force in the coming weeks.
More evidence points to a period in the coming weeks for a violent reversal in the capital markets. The obvious parallel is 2008. In mid July 2008, oil traded at a ridiculous all-time high of $147 but was soon smacked down hard, very hard. A commodity bubble was in place that fooled the stock market. I have attached here for our readers the stock charts of 2008 and I suspect few will recall that the S&P rallied nearly 1000 points in the days preceding the crash in September 2009. At that point the housing bubble had already been exposed to be a massive fraud and yet the markets were near their all-time highs. The banks had also recently passed the so- called “stress tests”. Of course, only weeks later the real stress tests to be measured were on the masses of investors who trusted their leaders, regulators, and the system itself. In Europe it seems they have taken leave of their senses, for they have fallen for the same trap. Stress tests in the spring, crash in the fall only weeks later. What a farce! The swings in the market from August through September 2008 showcase that our stock market does not reflect the reality behind the scenes one bit.
The Overrated Double-Dip- Much Ado About the Wrong Thing
The whipsaw that has marked the summer of 2010 continued in full force last week. The 5% decline in August was met with a sharp rally mid-week once September began as investors viewed the ISM and Employment reports as evidence of no double-dip. In fact, all summer it seems everyone has become
so enamored about the prospects of this double-dip it seems to me we have lost sight of a much larger threat to our capital markets-a meltdown in the debt markets triggered by defaults of sovereign and municipal defaults. These are not only likely but inevitable, yet the markets now levitate as if they are neither- and that’s the great disconnect right there. Today our markets assume that Illinois and Greece won’t default, yet they will. And of course this will change everything very quickly.
Those who know the K-Wave theory know the excesses hiding in plain sight will be purged sooner or later. They know that bond yields will rise even if investors know economic growth will be meager or even negative. The flight to “quality” myth of US Treasuries is sure to be exposed soon as the bond vigilantes emerge from hiding. In fact, I would suspect we saw the all-time peak in Treasuries recently because yields reversed much higher last week, especially on the long end of the curve. Is this trend were to continue it would have enormous ramifications upon all the capital markets because so many large and leveraged bets would have to be reversed. We must remember that these govt Treasury bond markets are so much larger than the stock market that if something unexpected occurred across the spectrum it could profoundly impact global financial markets through their exposure to financial derivatives contracts which are extremely susceptible to sudden moves in interest rates, even small ones. This is the real canary in the coal mine that I suspect will catch everyone off guard. There may or may not be a Treasury “bubble” today, yet there surely will be one tomorrow.
Another such canary is the US dollar. Although it remains the whipping boy for monetarism gone amok, it will remain the strongest fiat currency in the short term because as most counter-party contracts in the world are dollar denominated and thus cannot be so easily reversed, even if the US maintains huge deficits. The sheer practicality of unwinding US Dollar contracts is too daunting to render the USD as anything but the strongest fiat currency in the world for the foreseeable future, yet so many have bet on the other side of that trade. This squares nicely with the notion above regarding the perceived “sanctity” of US Treasury bonds and notes. The poof of this will be seen when US Treasuries sell off on bad news Don’t look now, but this just happened last week when US treasuries reversed lower last week during a period of deteriorating economic news.
If either of the above conditions take hold to any extent, then any discussion of PE multiples, cash on corporate balance sheets, merger prospects, and the like will just be idle conversation, relegated to those who choose to insist that classic fundamental analysis actually matters. It usually does matter except in those extraordinary times when the effects of economic global super-cycles are just too daunting to ignore. We now live in those times, for better or for worse, and their implications I feel trump the standard framework upon which we have come to value or markets. Do deficits matter? Very soon we will see, once and for all. It seems sure some form of the Bush tax cuts will be extended and other forms of QE by the Fed and stimulus from Washington are also forthcoming. I suspect that instead of helping us all as advertised that instead the measures give the bond vigilantes all the cover they need to dump Treasuries and upset the applecart that has allowed the Keynesian economics to become the monster that has roamed the countryside for so long. And that would be good for us all.
Something strange occurred last week the day after the release of the Fed’s policy decision Tuesday afternoon. Although the statement confirmed their commitment to loosen credit by purchasing longer term Treasuries it still left everyone baffled. Why push further on a string by attacking liquidity that won’t be put to use anyway given the trillions in excess reserves now loitering in our commercial banks? It may indicate the level of desperation now evident from the Fed. In their zeal to do something, anything to fight deflation they lost their best ace in the hole- the perception of an unflappable Bernanke in control at the helm. Like first impressions and trust, confidence is difficult to recapture once lost.
The policy statement surprised most observers who believed they would downgrade their take on the economy and just indicate a willingness to consider other measures (QE) if those conditions persisted. One former Fed governor, Lawrence Meyer, even said anyone expecting details of new WE measures were “crazy”. But it now appears that KC Fed Governor James Bullard must have exerted some degree of influence for just days earlier he set off a firestorm with much publicized comments warning that deflation was looming. His dog and pony show on CNBC stressed the need to enact new measures (asset purchases) given the limits of the “extended period” language that had been the standard fare. Investors (mainly HFT’s) took this to heart and the market rallied recently despite an outbreak of ever worsening economic data being released The worse it was, the more the markets believed they would get their beloved QE 2.0 with all the accessories. When the details of the policy statement revealed a relatively modest QE, the markets sold off because expectations weren’t met. So who’s crazy now?
One analyst compared the Fed statement to a doctor who prescribes asprin to a patient he has just diagnosed with a brain tumor. By splitting hairs in his own brand of Fed-speak, Bernanke and the Fed provided a less than half-baked solution for such a grand dilemma.
Since the announcement, opinion of Fed’s vision and strategy has come under sudden attack from all sides. Public perception that the Fed can “save us” is now being questioned and is sure to remain in doubt. Many say they are “out of bullets”, yet our commentary here for years has suggested they never had the ability to save us one bit.
We proclaim the doctrine offered by Robert Prechter of the Elliott Wave- you cannot defeat a deflationary asset bubble with a credit-based system. Yet the Fed and the Obama administration maintain such a stance with these Keynesian directives that now appear more absurd each day.
This absurdity is best reflected in the bond markets where madness rules like never before. Record levels of junk bond offerings, record low yield in corporate bonds, a two year Treasury bond below one half of one percent and ten year yields around 2.58% all reflect a deep conviction of uncertainty. These yields are even more absurd given the growing likelihood that most bonds, except perhaps high grade corporate bonds, are forming the greatest bubble in history. It seams reasonable to me that the grand finale of the fourth Kondratieff Winter would be preceded by a blow-off top of the bond market caused by a mad rush by investors to chase yield. But once perception catches up with the reality that default risk has been severely under priced, expect interest rates to spike higher in a hurry. This will rattle all debt markets and usher in a new era of self-imposed austerity- courtesy of the Kondratieff Winter just over the hill that only a few now see.
It’s The Dollar, Stupid!
At first glance, the 7% rally in the S&P during July seems impressive. The Dow and Nasdaq averages were just as strong. In fact every thing under the sun rallied in July-
Treasury Bonds, commodities, and every currency but the dollar. The risk trade was on because the USD plunged steadily all month. And who could be surprised? Since the financial crisis took hold almost three years ago the correlation between the US Dollar and all asset prices has enjoyed a correlation swell enough to make any economist blush.
Such dollar weakness also accounts for why the markets could enjoy their best performance in a year in the same month that sported the worst economic data in a year.
Yet something else took hold late July that may be the driving force in the short term. St. Louis Fed Governor James Bullard recent proposed changing the emphasis of Fed policy from maintaining near zero interest rates for an “extended” period to a new form of quantitative easing targeting longer term Treasuries. The markets took delight in this new approach and extended gains in recent weeks despite a steady supply of awful economic data that was released.
But this QE 2.0 by the Fed would be a tragic mistake I believe. While it may be cheered at first (if not already priced in the market), such a move could backfire because it would signal to investors that conditions must be far worse than we believe. It could signal a classic reversal in sentiment from hope that the recovery would endure to one of heavy and continuous dependence on the government. Bull markets are not underpinned by such a fragile psychology. They are born through technical break-outs sporting high-volume, strong sector leadership, and good market internals during a period of improving social mood. At present the market lacks all of these.
Themes we have discussed before not only survived, they thrived. Among these are:
Rates are so low that stocks must be owned-
But what if rates reversed trend and went higher? Despite the Fed’s new policy, rates could actually soar given new perceptions about the Fed’s balance sheet, now already stocked with tons of toxic debt. News of the Fed buying longer term Treasuries could have the opposite effect it was intended if investors demanded much higher yields for the newly perceived risk of QE 2.0.
Delusion-
The stress tests for the European banks were an open joke sans the laughs. By only measuring the banks trading books and ignoring their longer term portfolios, they essentially ignored 90% of their exposure to sovereign debt since that is the percentage on those portfolios. They also assumed no single Euro country would ever default on their debt. Investors have forgotten that they were bailed out by the IMF with loans that must be repaid. The markets have reacted as if these were handouts instead of loans.
Ethics is replacing Power-
I don’t know where to even start here. First you have Rangel and Maxine Walters going to trial in the House- in an election year, too. Throughout the month a steady stream of miscreants settled with our regulators for fines equivalent to just a tiny fraction of annual revenue, and for that our shrewd government officials weren’t even able to get any of them to admit to an iota of guilt or wrongdoing. Here’s a partial list, just for a single month- Goldman Sachs (double-dealing with clients), UBS (abandoned their own clients in auction-rate scandal of 2008), Citibank (mislead their shareholders repeatedly over their exposure to sub-prime), Intel (ten year period of blatant price-fixing), Countrywide (too many to list), and many others earlier in the year. Many of the bluest chips in the deck are nothing more than criminal racketeers and certainly other transgressions will be played out before us for many years to come.
High Frequency Trading has distorted price discovery-
Understatement, indeed. Few investors realize just how egregious it really has become. The abysmal failure of our regulators to reign in this practice may one day be regarded as the most colossal failure of regulation in the history of the financial markets. Their purpose is so blatantly unfair yet in a world of regulatory capture it all makes perfect sense. (More on this can be found in our Taboo section).
It seems that retail investors have gotten the memo. For the past 13 consecutive weeks, since the May 6th Flash crash, stock mutual funds have seen net outflows each week totaling some $520 billion dollars. There is a growing perception that as far as the market is concerned there is nothing real in the world anymore. Trillions of capital have chased the perceived safe haven of Treasuries in recent weeks while the S&P is up 11% since early July despite being pied in the face with the reality of deflation, the double-dip, and default on a significant level of debt. The only ones now left to chase the market are the professional money managers and hedge funds who aren’t fully invested that now must chase stocks or risk losing their jobs because they have underperformed.
Moreover, the HFT’s that comprise about 80% of the market volume has an investment horizon that can now be measured in milliseconds. Hence, some very strange and unique things may occur if any serious news were to hit the tape. Such an event could also occur though an “aha” moment that resulted from a steady drip, drip of data bringing the denial that deflation has arrived to a sudden death. Every single day now we hear rancorous debate about whether deflation is possible. As they say, if it walks like a duck….
I believe the collective subconscious of investors is approaching a tipping point of realization that there are substantial structural deficiencies evident in many areas. They see an extreme bifurcation of the economy between the elite corporations and small businesses that create the bulk of US jobs. They see the stock market melt-up on ultra-low volume despite horrible economic news. And they see structural deficiencies in the execution of trading in the markets through a maze of exchanges that are now dominated by machines instead of honest brokers. So I expect very soon severe reversals in three markets that each now sport extreme sentiment levels- the dollar, treasury bonds, and the S&P. Most shorts have been squeezed out of stocks and bonds, and too many are short the dollar. Their correlation for years has just been too strong to ignore, so look for all of the markets to reverse violently this month in a trend reversal of a primary degree.
The tug-of-war in recent weeks between bulls and bears appears over as the bears took control last week of market sentiment in convincing fashion. The fallout from the last seven consecutive losing sessions is only eclipsed by the psychological, technical, and concrete damage done to erode investor confidence in US and most global stocks. In June 2010 some of the hallmark features of delusion were exposed to a primary degree, namely the debt -based Keynesian approach now being exposed as futile and impotent. Hardly a panacea, it instead redirects capital so won’t chase its highest utility because there’s no accountability in the public sector. Ask any CEO in the private sector if he could get away with the enduring malfeasance that defines federal Keynesian spending. Sadly, federal spending in recent decades has been severely misguided and thus skewed the input from the public sector to the overall economy to levels that would upset our founding fathers. This Keynesian mess is far from what they sought in the intelligent design of our Declaration of Independence and our Constitution.
So brace yourselves for the third wave down of the fourth Kondratieff Winter. The signs of deflation can be seen anywhere you look- CPI,PPI, M3 in severe decline, housing, etc. For a glimpse on how this may play out, please refer to the most recent material added in the KW-Mayan section that traces the fractal chart timeline of the long wave super-cycle. It reveals amazing symmetry with the 1930-32 reality and traces out a severe plunge in global stocks in the coming months.
The excesses of this credit super-cycle haven’t been sufficiently removed and the cleansing period is now upon us. The fiscal and monetary stimulus provided since 2007 served the same purpose as methadone given to heroin addicts- it’s a short term fix that hardly fixes anything. The US economy and our capital markets are now experiencing the early stages of their own “shakes”, and likewise process is painful and not very pretty. The current pattern correlates the 1930-32 period of carnage despite the radical change that has occurred since the last economic winter in the 1930’s. Such is the majesty of our K-Wave theme- it endures throughout time because it is marked by the seasons of time.
The developments in June 2010 marked a true turning point in the perception of any lasting recovery. Any delusions of a V-shaped recovery were put to rest in May from the retail sales and unemployment figures and in June the abysmal numbers from new home sales, autos, and plummeting consumer confidence cast doubt on any lasting recovery. Earnings season begins next week, and expectations are high that Q2 corporate profits will look great when compared on a year over year basis. However the collective mindset on Wall Street is more concerned with the prospects of corporate guidance on Q3 and beyond which may let down those “animal spirits” still enamored with economic growth solely dependent on artificial federal spending to get through the night.
In recent weeks certain other cancers began to spread that would undermine any real economic recovery- chief among these is the state of our local and state governments. Most of these municipalities have become so severely crippled to the point where they have finally transitioned from denial to action in addressing their plight. While this is without doubt good in the long run and sorely overdue, it only adds to the problem in the short term because this implies significant job cuts and reductions in state and local spending at a time when our economy needs this spending the most.
Such austerity measures are classic proof positive that at all levels of government- federal, state, and local- plan their economic growth ass backwards. They should reign in spending as a permanent theme and resort to fiscal stimulus only during the troughs of the economic super-cycle. Instead they choose to keep the pedal down constantly through high growth policies and choose to reign in spending in periods such as the present, when stimulus is truly needed and could help if applied with diligence and purpose. Yet it appears now only the havoc of an economic winter will force our leaders to reconsider the absurdity of the present Kenyesian model.
The hints of such havoc festering in June made investors flee en masse to the perceived safe haven of Treasuries, taking the yield on the ten year bond under 3%- yes, 3%! What is that telling us? Simple- deflation has already arrived. The smart money knows that bonds are the place to be in the short and intermediate term. Yet all bonds aren’t created equal. During these early stages of deflation, US Treasury bonds, bills and notes and high quality corporate bonds will far outperform junk bonds, municipals, and REITS. In fact, I expect the spreads between these classes to widen in the coming months to eye-popping levels as investors discern between the grades of quality and realize that they are actually more attractive in the short term for capital appreciation.
However in the final analysis, only high quality corporate bonds issued by companies with cash flows sufficient to weather this downturn will suffice. US Treasuries are too fraught with credit risk and are likely to implode with muni’s when the music stops. And although the bond vigilantes are now in seclusion, you can count on their return when a whipsaw effect is possible as it is now.
Now let’s return to the debate between inflation and deflation now at the forefront. Since this vexing dilemma is so crucial to the ultimate direction of the capital markets, why is there no clear winner this far into the winter season? Why is deflation so hard to accept? Are we all really that hard wired in our DNA to believe that an upwardly sloping curve for stocks, the economy, and all assets is a birthright? It appears so, despite all evidence to the contrary. The housing market tumble in recent years should have taught us that, but apparently not. Why do certain lessons of history- that economic depressions and stock market crashes occur often and in regular intervals- remain elusive for so long to us?
The source of our collective ignorance may be seen best by through this “birthright” mentality. It is then more fully facilitated through the nature of these unique events that happens every other generation, so that very few who are presently in a position to impact the masses would ever have a clue about the scale and scope of the conditions of such a period. This trait is very purposeful because it’s born through the immutable laws inherent within the intelligent design of our universe. According, any outlier force such as deflation seems to only occur just when we least expect it and thus stubbornly deny that it may even exist at all. Oh what a tangled web we weave when we choose to ignore our past so full of latent clues. Don’t fall victim to the calm that always precedes the storm. Sell stocks and assets now. Get liquid so you can exploit the stock plunge on the downside or hedge your wealth in some way.
Discount this generational feature of the K-Wave at your peril. For every blowhard mainstream analyst pounding the table that corporate profits are all that matter there are legions over the millennia that would remind us just how easily we are fooled by our own dogma. Such a dogma may suggest we have a nature more insidious than we would choose to believe, including having the audacity to believe for even an instant that the fiat currency ponzi scheme now underlying the entire global financial system is safe and enduring. Sorry folks, it isn’t.
Such systems aren’t safe at all during the later stages of economic winters, when the cleansing phase is in full swing as it is now. This cleansing phase will take a giant leap forward by the end of July when certain astrological conjunctions align that unite conflict and scale as never before. Pluto has entered Capricorn to shake down all that’s wrong in this world and all the while Jupiter and Saturn will emerge to provide the scale needed for enduring change. These line-ups last appeared during the early 1930’s when the Dow Jones plunged over 90% in just under two years (read more on this see Astrology and the K-Wave in the Esoteric section). These emerging conjunctions indicate that a more far-reaching and provocative catalyst is just ahead. Some may snicker at any mention of the impact of heavenly forces on the market, but history shows they are quite relevant.
Given this and the projected path implied by the sacred geometry of the Elliott Wave, the developments in the capital markets and social mood could be quite remarkable in the coming weeks. Surely, when I post comments in early August the world will seem a bit different to us all. We are now inching toward a new worldview that will soon re-think the value of material gains and re-value a spirit of cooperation among those engaged in business and commerce.
Last Call for Casino Capitalism
Recent weeks have been cruel to investors married to the hopes of a sustainable recovery in the US economy. The jobs report yesterday was the death blow for even the most ambitious cheerleaders of US economic might. The V-shaped recovery now seems as absurd as the “goldilocks economy”.
The catharsis of this jobs report cannot be overstated. The data showed the public sector adding jobs 10-1 over the private sector despite the longest and grandest government stimulus in history. The Keynesian philosophy at the core the systemic dysfunction in our economy and our capital markets will soon be on trial for its life. So will monetarism and the long held conviction in the “efficient market” theory now in tatters. We are now seeing firsthand the futility of fighting a Kondratieff Winter.
In the month of May, the capital markets got the memo. US stocks are now off more than 10%, which implies correction at the minimum and most global stock markets are already in bear territory. in most global markets. The selling in recent weeks has indicated a prohibitive reversal in sentiment through a classic distribution pattern revealing of selling from strong to weak hands. Yet the case for a bear market is even more pronounced when you consider a range of variables far outside the “quant” models that are the DNA of the so-called “experts” featured on CNBC and elsewhere.
Even many of these exuberant advocates of the US economy and stock market have recently become quite unnerved by the ominous events that occurred in May. Chief among these was the 1000 poin “flash crash” drop in minutes on May 6th. Also troubling was the frequent 20 handle reversals of the S&P average during the final few minutes in several sessions, the BP oil rig fiasco, escalating geopolitical tensions in N. Korea and Israel and more. This is very unsettling, and some including myself feel something big is imminent. I posted two new source that suggest something grand will indeed soon manifest. The first one relates to the significance of a series of astrological conjunctions that began May 19th and continue through August 26th. This information is acutely powerful and relevant, yet I still haven’t heard a peep about this from the financial press. Small wonder.
The second one, which is attached here below, provides a powerful argument that a sudden market crash, much like 1987 but far worse, is likely. It argues that the May 6th “flash crash” is a foreboding omen of things to come. Their thesis holds that in the distinctly unique conditions that have formulated in recent months will manifest in the marketplace – very suddenly. The rub here is that the mathematical algorithms underlying the dynamic hedging models of the quants are fatally flawed because they assume sufficient market liquidity is a constant. For a brief period on May 6th however, that notion proved to be a pipe dream when the old order broke down like never before. Anytime a Dow stalwart such as Procter and Gamble plummets by half in just a few minutes, our trading platforms are seriously impaired. Without this crucial liquidity backstop that has been a hallmark staple of our exchanges for so long, the proverbial “black swan” event could unfold without any significant black swan trigger event.
This happened to an extent in 1997 when the Long Term Management meltdown threatened a global contagion. That crisis was triggered by flawed algorithms developed by Nobel Prize winning economists who failed to appreciate basic tenets of the impact of global interconnectedness through the currency crash of the Thai bhat. That something so insignificant caused such a mess should be noted today by anyone claiming this can’t be repeated. Such risk is at present not reflected in current valuations. This squares nicely with the tipping point proffered by Robert Prechter. It implies that a Kondratieff Winter deflationary asset bubble is bursting before our very eyes.
Why? because this fourth K-Winter is in fact the bookend of a grand super-cycle, not just the K-Winter of a typical super-cycle as in the Great Depression. But only those investors who fully appreciate super-cycle dynamics will understand this distinction. Explaining this distinction is one of the primary goals of our site.
Yet it seems most investors today are completely ignorant of super-cycles. In my view, a crude sentiment continuum among investors resembles this: 10% are raging bulls: 50% are lukewarm bulls aware of the headwinds but still bullish on stocks because the market is still so far below its highs in 2007; 35% are bears who are correct on the market headwinds and direction but have underestimated it’s true potential; and the remaining 5% are mega-bears like myself and others who maintain that these long- wave models indicate a correction exceeding 90%.
I recently saw Ian Gordan give his K-Winter slide presentation at the New York Hard Assets Conference in May that supported his target of Dow 1000 or lower in just a couple of years. The year before I saw Robert Prechter support his target of Dow 500 with equally cogent supporting data. It is important to know these numbers are not derived from a capricious approach but from empirical models based upon hundreds of years of data. I realize how difficult it must be for most people to take these projections seriously, but if history is any guide then they are not far off the mark. This is the inconvenient truth of long wave super-cycle theory.
MUST READ!! Confirming the Omen of May’s Flash Crash