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Head-Fake
A friend sent me the following chart. The arrows, shading etc. are his.
Note that he has a few questions. If you can answer the second question
you could make some money.
The green shaded area was clearly a head-fake by the market. This was
(in part) a reaction to the Greenspan comment that the economy had “hit
an invisible wall”. Alan was right. Many indicators and a fair number of
soothsayers (myself included) saw the signals and concluded that a
double dip (or at least a significant slowdown) was in the cards. As far
as the markets go that call was dead wrong. The view was that
employment would continue to worsen. That of course was spot on. Wrong for the right reason. Yuck.
The yellow line covers the time that QE2 first became official. It took
the Fed another two months to actually implement the policy after the
September comments by Ben. But there was very little doubt on the
outcome right from the get-go. Yes there were speeches and planted news
stories that suggested there was some debate. That was all show pony,
there was never any doubt about the outcome.
Stocks have loved it. Why not? The Greenspan Put worked great for a while. QE is even better. The Bernanke Put is ‘In the Money’.
The thinking is you can’t lose. A very dangerous state of mind. The
bond reaction was: buy on the rumor and sell (hard) on the news.
Looking at the chart since September you have to ask the question; “Is this real or is this another head-fake?”
It’s hard to fight the lines that point up since September and not
conclude that the market is telling you a sustainable recovery is being
formed. I read a fair bit and can say that an awful lot of pundits are
looking at this and concluding that the worst is behind us and that
reasonably solid growth is on tap for 2011. The next read on the Leading
Indicators will no doubt show an uptick, the principal reason being
that the yield curve has steepened.
I am going to stick my neck out and say it is a head-fake. It is not
clear sailing in front of us. Some things that I think “fight” the
conclusion that stocks, bonds and pundits are drawing:
-Sustaining the Bush tax cuts is not a stimulus. No one’s check is going
to be bigger as a result. This is more of an absence of a negative
versus a positive.
-The $115b, 2% reduction in Social Security taxes is a stimulus. But
not much of one. It comes to $15 a week for the average worker. Helpful,
but I don’t see it changing things too much. The reduced deductions are
largely offset by the elimination of the Make Work Pay program. Net net
no big deal.
-The dollar is too strong to think that our economy is going to grow
much. 2011 will bring us higher trade and current account deficits.
-2011 will be a year of non-stop muni “crisis” talk. What this really
means is that the states, counties, cities, towns and villages will all
be cutting expenses. They have to. They (for the most part) have to
balance their budgets. Big cut backs in muni spending will drag on GDP.
-BABs is dead. This is going to make a difference in how big ticket
projects are financed. Large construction projects of hospitals,
schools, roads and the like are going to have to be scaled back.
-Energy prices are rising. In 2011 we will see this in both electricity
and gas. That $15 a week savings from SS is going right out the window
and into a gas tank.
-The cost of food and insurance is about at least 10% YoY. Don’t look at
those CPI numbers. Look at your bills. Real disposable income is going
down, not up.
-We will spend most of 2011 with unemployment NORTH of 10%. Give me a
break, how can we expect much growth with that as a backdrop? Sure the
checks are still going out. But this is the third year that we have been
at post depression highs on UE. We also know that the UE numbers are
bogus. The number of people who are out of the system altogether or are
working part time just keeps getting bigger.
-ARRA, the 09 stimulus, is essentially finished. Another absence of a positive.
-We will have ZIRP. A plus. But how much of one? Loan demand is not
responding to ZIRP. Most large companies are sitting on bundles of cash.
ZIRP actually hurts them.
-Mortgage rates are not getting cheaper. Long-term bonds for corporates have backed up a bunch.
-We have six months of QE2 left. The last month will see only small
amounts bought by the Fed. Therefore in approximately 75 days we will
be sliding downhill on this program. I’m not sure what it means or what
will be the outcome. I know it will add to a sense of instability as
something very significant will be passing into uncertainty. Put
differently, we have 53 trading days left to half-life. Not much time at
all.
-Don’t’ count on the EU lifting US GDP in 11. Not going to happen. China
is a question mark. I say that they cool in the coming year by more
than the current thinking.
-Wild Card. There are always surprises. Rarely are they good.
What are the odds that we see a head-fake? A surprise outcome where
numbers and events force a significant rethink of the now prevailing 3+ % growth in 2011
story? I would say those odds are not too high. Does 30% probability
for a hard landing sound right? It’s very hard to handicap. One thing
about this; if we do see the head-fake it is going to put a big dent in
markets that are now trading very rich.
If the first few weeks in January give us another run up in equities and
yet cheaper bonds it might be worth buying some out of the money
puts/calls. The money spent may be a throwaway. But if in fact what we
are seeing is a big misread on the economy and a distortion by QE2
then we are going to see the bottom levels on the chart again.
Something like that happens and there are big multiples on the money
spent on the bet.
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A selloff/correction of over extended equities may take pressure off of UST yields........just a thought in a 'fixed' market.
Merry Christmas Bruce, and very best wishes for the New Year. Thanks many x for all of your insightful work.
The analogy I see is that of an aerial dogfight where the planes are approaching their respective "coffin corners". The US will be the last to reach their "coffin corner". Next to last will be Germany.
Once Britain reaches it's respective "coffin corner" we will see resolution to this economic malaise. After all, they view themselves as the world's centre of banking. Both Germany and the US will surpass them when all is said and done.
That said, I do not see a significant decrease in the market for some time. The British banking system needs to express significant stress in the media as a sign that things have reached a breaking point. At present, all the British media can talk about is German machinations related to the Euro, the EU, and the ECB.
Not one word is being expressed about the World's Centre of Banking during this Global Banking crisis.
Once Britain comes under stress, we may well see the bastardized Basel III standards morph into true, respectful, transparent global banking standards. That will mean consolidation within the European banking community and the loss of many global banks who represent the small states of Europe.
That said, we will have moved toward a true global financial market. At present, no one state can truly fix the regulatory problems associated with global banks as there are too many divergent jurisdictions that will harbor the "foul" players and allow them to "rape" the global system. Ergo, the "coffin corner".
As Basel III goes nowhere and is a political response intended to maintain the status quo in global banking, the various states will manage their monetary and fiscal policy to keep their global banking representives in the race.
This means there is a long term market for the US dollar. Expect it to strengthen and expect the Fed to print money to manage the rise and attempt to generate slack in the dollar's use. Panic from Europe will likely result in a large market for freshly printed US dollars as the safe harbour. Everyone sees the US political resolve (for the engineering of it's economy) as the strongest on the planet.
Domestically, a strengthening dollar leads to more printing as the stock market valuation must be maintained for domestic political reasons. What will likely happen is an upward drift in Q1 of 2011 followed by treading water. After all, where would you go?
The Chinese have generated a market for faux-gold. You may find political advantage by discovering additional counterfeit gold in the global marketplace.
How will the bond market react? Who knows. A stable low interest bond market is needed to make money in the equity market. The decay of the PIIGS will push many european states into their respective coffin corners shortly. I think the global central bankers think they will not hit their respective coffin corners much before 2013. The PIIGS need to clean up their acts before then. Global banking standards need to be fixed before the money printing stops.
"Basel" relates to "leverage" which relates to "profitability" in the bond market. That three legged stool will lose a leg, the only question is which one. Common sense is that "Basel" gets fixed first. Leverage and profitability are parameters of the coffin corner.
Failing to plan is planning to fail.
Oh, and Merry (consumption orgy that has nothing to do with religion) Christmas all!!!!
Has anybody noticed the S&P 500 double-top on a 20 year chart? I am not a devout technician, but I think there are enough exogenous factors to lend more credence to this pattern than I normally would. = Ba-Bye S&P
Muni Bomb, Energy Price Inflation, and no meaningful change in employment.
Get your chutes on.
Growth of the equities market without macro economic growth. I don't know whether it has ever been done before, but it's happening now.
I've followed Phoenix for years on SA for good reasons, but to answer the question, I don't think this is a head fake as such. There will be bubbles from time to time, but we're on an upward slope to oblivion or a miraculous return to the real market. Take your pick, but the only way is up, as long as Bernanke is at the Fed, and the Treasury's sovereigns are picked up by China, Japan, & the EU. I reckon Plan B must be doing the same via the IMF. Oblivion may not be averted, but it's going to take a long while to get there imho.
Merry Christmas
Growth of the equities market without macro economic growth. I don't know whether it has ever been done before, but it's happening now. Oh, so true.
A return to a real market would look like a depression in the short term. This would bring pain as real price discovery would take some time to work through the economy. (Real price discovery and the fraud prosecuted and stopped ... never gonna happen ...)
"The only way is up" I agree. The only way to maintain this at the required level is via some false economy. I think that if they had a false economy to introduce then they would have done it already. Hence the problem.
Solutions? Wait to participate until this thing breaks or the next bubble can be identified. Stay as far away from the impending train wreck as possible then profit from/in the aftermath.
http://mises.org/daily/2532
Happy ChaunaQuanzaSolstimas
BK is correct. The "net" new stimulus from the payroll tax is only $115B or so....coffee and donut money....not enough to get us to 3% GDP, let alone 4%. We'll be lucky to see
2% GDP in 2011. You want to pay a 23 multiple on that? Good
farkin luck....
You have to remember that every penny that the FED is printing and going to the banks is used 35 to 1 with leverage. That is why the market is going up. One Dollar becomes 35 Dollars in terms of buying power.
Plus, the Manipulation by the HFT Computers that only know how to bid stocks up.
+1 Yep, but there are pretty good algorithms that know how to bid stocks down as well. +ve or -ve feedback works the same, except one is finite (-ve), and the other theoretically infinite (+ve).
Merry Christmas
This reminds me of an old skool 'black bin liner' auction...you know...the one where the 'house' has its 'plants' scattered throughout the audience - and the house always 'wins' some appealing bauble or three to get the 'mug punters' to bite
And when they do...they only 'win' shit!
This is all a head fake...and my dad had the right of it when he reminded me 'the best way to make someone work harder, for longer...is to pay them less'
The Bangladeshi's are on the streets rioting about their stock market ass reaming and the same fate will befall any non-insider who thinks they can make more than the .1% interest on their savings account from participating in this casino
The house ALWAYS wins...ALL WAYS!
Merry Xmas everyone...and let austerity go and fuck itself for a couple of days
check out the articles on the Zimbabwe stock market for parallels to our stock market.
Sure, you can make money in the market, and gambling in a rigged casino, or picking up nickles in front of a steamroller. But is it a good idea?
http://ftalphaville.ft.com/blog/2008/06/23/13987/the-mad-market-of-zim/
http://mises.org/daily/2532
http://www.dailyreckoning.com.au/zimbabwe-stock-market/2007/07/31/
I believe the FED will continue QE to preserve the appearance of recovery through POMO until they create inflation and impair the dollar.
FICA withholding reduction is as close to dropping money from helicopters as you get. They are pulling out more of the stops. Look for more moves to get money into the hands of consumers
So, what's a market-illiterate like me to do? How to hedge, that is the question.
Don't buy anything that Bernanke can destroy, or anything that requires you to read a prospectus.
Silver did well last year, no reason for the trend to change. It's a tangable asset, there is really no downside to it.
Oh and by the way for you "valuation" types who worry that P/Es will be too high. Please consider that a rising stock market helps to raise earning. yes you heard that right - the causality runs in the opposite direction to what you may have been led to believe.
There are numerous reasons - and creative accountants will come up with many more angles to "monetize" rising stock prices into earnings.
I know this may sound bizarre - but bear with me and ask yourself the following questions:
1. How do you feel when the S&P in a herky jerky manner exceeds 1500 in 2011?
2. Will all the people scared away by the "Financial Heist - oops "crisis" - kick themselves, and decide to jump in at that point? I mean can they take it anymore?zero yield in cash and all their stupid neighbors having been up 100% in 2 years - it will be too much to take. Wont they jump in?
3. As the bloom wers off the emerging markets ( high inflation, rising rates - will probably put and end to that particular property bubble masquerading as economic growth).
4. Is the Fed helped hugely id the S&P crosses 1500 and is looking up? Does Ron Paul look a little foolish raining on the party?
5. Are many of the pension and retirement woes magically "fixed" when the stock market crosses 1500 SPX ?
6. Has the Fed said many times that it intends to get the markets up- or not? Do you doubt that they will try . And they do have some influence on things?
the most important point of all. commodity prices. they are going exponential since QE2 rumor was dropped. they will break the Fed's back at some point in the next few months.
it is politically impossible for the Fed to continue pumping when oil hits $100+ again. the Fed will stop, or be forced to stop by the commodity bubble because it doesn't help the economy like the real estate or stock bubbles.
QE I and QE II have done nothing but prolong the agony.....nobody has "fixed" anything in this economy and I don't see anything on the horizon that would give this economy a lift. It just isn't there. Devaluing the dollar was supposed to help reduce our debt to other governments, but you don't think they have a plan or two for us? I look for a steep drop in January, then again in February. I also saw a projection that Congress won't allow QE III; which they shouldn't. The FED is nothing but a boat anchor and should be abolished.
Merry Christams to all.
its erroneous to say the retail investor doesn't have anything to say about this. fact is there are a lot of people who have long term capital gains who can't afford to collect their profits. as that group dies, RIP, the cost basis goes to zero and their heirs will dump those stocks like a bag of stolen merchandise.
For those who have capital gains and are still young, the problem for the hedge funds and so on, is that as these stocks lose value, selling them suddenly becomes less financially painful, and more emotionally cathartic. boy I just got out of the market, and do I feel better.
There are course a third group, pensions funds, and those under duress whose assets are in control of the state, like Medicaid in CA. They can't do anything with their money, unless they agree they pay outstanding bills.
And fourth are people who investment is through a pension fund, and have nothing to say about it, other than voting for the same hapless, helpless board members who run each time, and who don't do anything. (but what can a huge pension fund do? sell all their stock and buy farm land?) In some states your ability to interact with your state pension fund is next to nothing. But in CA for instance we have some say, mostly symbolic. Mostly nobody cares, because retirement is years away, or death is much closer.
so you see the majority of retail stock investors, buy and hold, are stuck in some sort of quandry. In the end they, or their agents are not going to sell. In order to bring the market (DOW30 mostly) to its knees means throwing widows and orphans out in the street. And it can only happen if the general economy, prices of goods and services drops along with it, so if CPI is negative so should the market. So is it a head fake, duh?
BK, I suggest you brush up on your Martin Armstrong reading. The answer you seek has been public for a long time. Your clue is 2011.44 or .45, +/- one week or so. Best of Luck & to you & yours a Merry Christmas!
P.S. Remember there are tectonic forces at work at this juncture. Shifting of the plates due to unforeseen circumstances can cause extreme reactions. The schema builds...
It tasted like chicken to somebody. I haven't met such a somebody, but there must be some of them, because, well, look at the tape since September.
worth watching
Bloomberg Dec 22
http://www.clipsyndicate.com/video/play/2058683/groenewegen_says_corneri...
Just an amazing amount of propaganda coming from the "captured" financial media. The theme of the month seems to be that the gold bubble is about to pop and the S&P in on its way to 1500, or the DOW to 15000. The people's rag USA Today tells everyone to take their rentmoney and invest in stocks. Pravda has nothing on these folks.
Having seen it all for many years, I can only conclude that certain fascist concepts now being tried on the people are testing us for the eventual crash in all things economic. They are hoping that they can hold it off until Obama's 2nd term. Events may overwhelm them. I almost wish I could start a war all by myself.
not to mention that the on going collapse in real estate is already baked in and $100 oil is a non issue as folks are now conditioned to expect to pay up to $100 for a fillup
worth reading again
http://www.zerohedge.com/article/guest-post-lies-across-america
Bruce don't forget the greed factor..it's only a gain when someone sells. Right now it's all on paper. he he
That wasn't chicken?
Anybody see the kitty?
The rise of the stock market is more a reult of QE (i, lite and ll) than anything else. Comapnies have trimmed fat, had the benefit of ZIRP and parked cash. Overall equity is still down trilllions as a result of both residential and commercial RE. What are PE ratios doing? (If they go down we have a new bubble forming). Interest rates are rising (meaning bonds are losing)...as IR rise and commodities rise productions costs rise squeezing profits. My bet is that the squeeeze is bigger than the rise in sales and has a negative overall effect. The stock market has been supported artificially, plain and simple. Unless the rest of the markets follow (which they won't) then the future does not bode well for the stock market IMHO.
May the twat knocker who dare junk this or any other post in this thread, be condemned to a slow and painfull death by asphyncteration.
Forward this to at least 10 people on your "friends list" ASAP. Failure to do so may result in the same fate awaiting our local resident serial thread junker.
...What, VELO still here? Go vomit elsewhere...
Sometimes it feels good to get a good junking.
Just like the smell of napalm in the morning.... ahhhhh.
Well, I hadn't planned on junking this article or your note even though it's by the retard bankster Krasting. But, since you are requesting...here's a junk for you. Merry Christmas!
I agree with BK. The elections are over, and no politician gives a shit for at least the next year. If anything needs to be exposed, problems fixed, debts written off, or pain suffered, it's going to happen in the next year.
Bernanke's agenda is to save the banks and keep a lid on regardless of the cost, but this no longer matches the agenda of the pols in DC. 2011 will be an interesting year.
I find it amusing that you are all still talking about 'patterns' when it is obvious that market behavior is totally fucking random. WAKE UP!! Seriously, you all behave as if the economy is composed of recorded statistics, have you never read Toffler? Taleb? Barbell mean anything to you? Randomness rules, bitches!
Gold meet the dow at 15k on 1/1/12
After they are done destroying people's money in the treasury and bond market. The muni market collapses....then we can get on with the real economy not before. And what will be left is a shell. Divide the amount of money we owe our foreign creditors by our gold supply and come out with your gold number. then comes printing money. gold reaches a major high in 2012. Get ready for a wild year. The 72 year bottom in economic confidence is April 2011. Only beware of that fibanacci retracement in gold from 3500 to 2300.
For me the biggie question of 2011 is what will happen with QE after its current six-month mandate runs out. Number two is what will happen with federal spending: will the Republicans actually try to and succeed in making significant cuts?
I take for granted that we'll have a whomper of a Spain crisis in the spring. However, I think the Spain crisis will scare central banks and private investors away from all kinds of sovereign credit, and not produce the flight back to Treasuries that most analysts are anticipating.
I don't see fiscal stimulus as pro-growth, as the foreign-borrowed portion merely drives up imports and the domestically-borrowed portion merely crowds out private investment. Without spending cuts, I expect a slightly increased deficit partly due to the end of Tarp repayments which suppressed the fy10 deficit. Spending cuts would immediately hit their direct recipients while providing a slower boost to the broader economy.
The lack of foreign buying of Treasuries means the fiscal deficit will have to be funded almost entirely from domestic sources, as in fact it already has been since early November. That means weaker US imports, which will boost growth, but more crowding out of private capital, which will suppress growth.
QE of course makes it much easier to fund the deficit and that will be the main reason, albeit never admitted, for continuing it, as I think is most likely. QE unlike fiscal stimulus really can boost growth by pushing investors into riskier investments. That's why I think 2011 will probably be a good year for stocks, though with a lot of risks. In the end, in 2012 or 2013, this QE-induced growth will come back out and more as it is proved to have been malinvestment. But who would expect this monetary-expansion-junkie economy to learn such an obvious lesson.
If QE is halted it will produce quite a shock and 2011 will not be a good year for stocks after all. Stopping QE of course would be very good for the economy, especially if combined with big spending cuts. Eh, dream on.
I don't know, I just don't get why you guys don't like money.
Stock market is going higher, I don't care it's real or not. who gives a damn.
Correction = buying opportunity.
crash? might be, not before 14xx reached.
Your view is sad and short-sighted, Jack. Sorry to read that anyone would pursue such a constricted course of action. BTW: None of your junks is mine. Your statement is not junk. It is simply an opinion and that is valid -- if disheartening.
Up like Zimbabwe, to the moon on a house of burning cards
Pathetic that we wonder if 3% is optimistic but if accurate, justifies the equity bloat - while in recoveries past 6% was the norm.
QEx can't sustain the chart alone. There needs to be something tangible or quasi-tangible. A bubble. A bubble should cure the pesky unemployment problem and allow the chart to go higher. Where will the next bubble come from? It has to be something that everyone can participate in so that they can be burned at a later date by the Oligarchs and profited from. Water? Energy? Food? (entertainment, labor, security) I am hard pressed to think of anything that could be bigger than the housing bubble though.
Gold and/or silver?
Carbon. Unless you don't breathe or need to stay warm or eat.
Google "CitiGroup Spooky Chart". January 3rd was peak, in last 4 rapecycles.
All of your friend's points seem valid but I'd like to see this chart reworked with one Y-axis that both the S&P and 10yr. can be expressed in terms of. Back of the envelope: here the range of the entire left axis (bottom to top) is about 25%, the right: 36%. Shouldn't that matter? Maybe not so much in this case but if you tweak the interval spacing on either the S&P or the 10yr performance you can probably get the graph to look like a lot of different things.
In any case I'd say that there is way too much external manipulation involved now for these markets (at least in the case of equity) to be functioning as reliable future discounting mechanisms.
And that's the key, imho. When the market has been rigged to prevent price discovery, you don't really have a market any more, nor does the (non-) market have any logical connection to the economy. At this point, I'm not sure you can look at the market and draw any conclusions about the economy, or learn anything about the market by studying the economy.
However things turn out, I applaud your willingness to state your best guess so clearly, Bruce, without the usual ass-covering that most economic predictions rely on.