Guest Post

I think if we had the global leader app functioning, we would find that most are on vacation somewhere, making it highly unlikely we get any big intervention over the weekend.  Merkel and Sarkozy just finished a summit.  Obama is definitely on vacation.  I just don't think they feel the level of urgency the market wants them to have.  Trichet has done a lot already, more than any other entity in the past couple of weeks.  What more can he do?  When does he get replaced?  I don't see the ECB announcing anything new.  And what about Ben?  He seems to like Jackson Hole, and he has been far less keen on making weekend announcements anyways.

Now I believe it is time to fast forward to the fall of 2008. Once again the 2008 market is a road map of how human emotion reacts when credit events happen. When economic data deteriorates at an exponential pace. When the unthinkable becomes reality. The volatility skew relative to the vix captures market sentiment very well. Overlay any such chart with the SPX and the similarities are without question. So for all those pundits who say this is not 2008 I present the following chart. Once again markets are pricing in the unthinkable. In 2008 history witnessed the failure of Lehman, AIG and the GSEs. Today history is bearing witness to sovereign nations on the brink of failure. In 2008 there was the threat of bank runs. Today there is the threat of currency runs. In 2008 there were government bailouts. Today there are central bank bailouts.

The sleepwalking during the last 24 months is all the more remarkable, given that the economy has been treated with the biggest dose of monetary and fiscal stimulants ever administered in U.S. history. Why the continued weak pulse? Each recession has its own story – how long it lasts, how deep it gets, industries worst hit, particular bubbles burst. But in every recession, the heart of the problem is the same, namely, an imbalance in the market for cash. Every recession begins when the aggregate amount of cash that people want to hold (given their wealth and the other things they want to own) is more than the amount of cash actually in existence. That imbalance – the demand for cash exceeding the supply – depresses the entire economy because the flip side of the market for cash is the market for everything else. All markets and all industries are hit, and most of them contract because most people are trying to sell more than they buy... which is the only way for anyone to increase his cash holdings and which is impossible for everyone to do at the same time.

For the last several months we have been posting our Economic Output Composite Index and warning that it was heading to levels that typically denote that the economy is in a recession or about to be in one.   With today's read of the Philadelphia Fed Regional Manufacturing Survey coming in a not just contraction levels but a massive collapse to the downside, as we have been saying was a possibility, the EOCI index is now at levels signaling recessionary warnings..The safe play in the current environment is hedged investments, cash and fixed income for the current time.   This has not been, nor will it be any time soon, a "buy and hold" investing market.   The management of risk, the conservation of investment capital and the generation of total returns from portfolios is paramount for investors to survive the cycles that we will face in the coming years. 

I prefer to quote Shakespeare rather than Monty Python, but the Black Knight scene just keeps popping into my head lately.  We have been in a period of intense volatility, have hit levels on the SPX (1100) that very few people thought we could.  Yet, the perma bulls have been back in force over the past few days. Armed with 5 days of decent performance and year-end forecasts of 1,400 or more, those perma-bulls were out in full force with their usual arguments. "Transitory", "temporary", "just a soft patch", "decoupling" (I have lost track of who is decoupling from whom, and when that decoupling is good), "contained", and "oversold".  For the past few months, if not longer, the perma bulls cling to every EU plan as an excuse to rally.  Virtually no attention is paid to whether the plan is feasible or if it would even work, it is just assumed to be good and that Europe will finally be fixed.  Any scrap of positive economic data is instantly glommed on to and is repeated ad nauseum.  Bad data is pushed aside or blamed on something - weather being a favourite scapegoat.  Anyways, as I see and read this daily denial of the real problems that still exist, I just keep thinking about that knight insistings "It's only a flesh wound".   

In the first quarter of 2011 (Q111), net gold hedging was reported by GFMS and Société Générale. A gold mining company may hedge its production on expectations of falling gold prices in order to lock in high prices and possibly avoid losses. As gold hits one nominal high after another, is such behavior a sign that the bull market in gold is over? To answer that question, we had a look into Boliden’s (T.BLS) latest interim report. The GFMS study mentions that in Q111, Boliden was one of the most active hedgers; it was accountable for 58% of gross hedging activity during that period. Let’s have a closer look at the company.

Did you know that the word ‘idiot’ is actually derived from the origins of democracy in ancient Greece? Thousands of years ago, a Greek citizen who demonstrated disinterest in politics was labeled ‘idiotes’; it literally meant ‘private person,’ which curiously enough was a term of derision at the time. Fast forward to the pitiful excuse we have for a democratic process in the world today, and the opposite is now true: you have to be a complete idiot to invest yourself in these politics.

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Courtesy of The Chart Store, here is more evidence that the Fed just pushed the day of reckoning forward a few months: the first charts the current NASDAQ market plotted over the Great Depression Dow, and the second plots the current NASDAQ over the post-1989 Nikkei market. The similarity of the two Bear market progressions is uncanny. As Ron Greiss of the Chart Store notes on the chart, "Did QE2 prevent nature from pursuing its intended course?" Judging by the recent "unexpected" cascade in stock valuations, it seems the Fed has yet to learn that you can't fool Mother Nature for very long:

Hi GW, It’s been so long! I’ve been skiing like a madman down here in Chile—but I did catch something you wrote, which I’d like to comment on, now that a blizzard has hit the slopes and I’m stuck inside with not much to do. You wrote a post yesterday, picked up by Zero Hedge and others, pointing out that Paul Krugman is advocating war as a fiscal stimulus solution. You pointed out that this position he holds is not only blatantly immoral, it is a position Krugman seems to have no problem openly pushing—your unspoken implication being that this is disastrous, considering how influential Krugman is in major policy circles. With regards to K. pushing for war as the ultimate Keynesian economic solution: I hate to say “I told you so”—but in this case—I told you so! (Cheers, mate.)

Throughout the PIIGS crisis, it has been a given that the German juggernaut economy would provide the strength for the rest of Europe to rely on. Last week's weak French GDP number highlighted concerns about the ability of France to retain its AAA rating. Today's weak German GDP numbers will make it even harder for Merkel to convince German's that they need to spend even more money fixing problems abroad. Certainly some opposition members are likely to use the weakness as a sign that she has had her eye of the ball and the domestic economy is suffering at the expense of all her bailout jaunts. I think this potential weakness in the core of Europe is a new addition to the growing list of problems facing the global economy. Empire manufacturing, a relatively minor data point, was awful yesterday. Stocks were able to ignore that yesterday, just as they ignored the extremely weak consumer confidence number on Friday. It feels like a lot of hedges were cut yesterday and the bullishness that was inspired by the strength of stocks has been replaced with doubt again. So far people aren't rushing to put on hedges, but the tone has become decidedly negative.

I am confident in predicting we are about to have another Global Financial Crisis—I’m calling it The Sequel: Same movie, same players, same story. Only this time around—like all good sequels—the financial crisis we are about to experience is going to be bigger, longer, and uncut by bailouts. By the way, that is the key difference between 2008 and 2011: We’re not going to have a Hollywood Ending this time around. The governments of Europe and the United States, as well as their respective central banks, do not have any weapons to fight off this 2011 financial crisis, as they did in 2008, for the simple reason that they used them all up—they’re out of bullets, both monetarily and politically. So when The Sequel hits the big screen, there won’t be a Big Daddy Government deus ex machina to come save the day in the third act twist. When The Sequel hits, we’re on our own.

There is always an element of price action driving investment decisions, but today it seems to have hit unprecedented levels. The relief is palpable. People are getting bullish again, but so many of the bullish comments seem to start with the fact that stocks are up today. There were some investors who were happily long coming into this week, there were even some who were short at the start of last week and turned into bulls at some time last week (hats off to them). What is bizarre is how many people who were nervous longs last week, suddenly feel comfortable. If stocks were down 5% would they still be so bullish? What is driving the bullishness? Stock prices being up, really does seem to be the biggest driver. We are seeing short squeezes in the most liquid asset classes, particularly those used as hedges - CDX indices, BAC CDS, Gold, beaten down ETF's like XLF. Italian and Spanish bond yields are unchanged to a tiny bit higher. That should be watched. Some IG new issues are in the market and are being priced at a large concession to existing bonds. That will put pressure on the real market. With some core real markets not responding as well as some of the hedge markets, I am not convinced the rally will remain persistent, and since so much of bullish sentiment is coming from the rally, that could turn negative quickly.

In 2011, so far gold has been the champion investment above and beyond any contender, including stocks and equities. At the announcement of the S&P downgrade of America’s credit rating, only gold showcased immunity. In fact, gold has thrived (as we predicted) in the face of any potential economic threat, from deflation in stocks, to inflation of fiat currencies. Some may wonder, though, where silver has been while its big brother is flexing its investment muscle? While traditionally, silver tends to follow market surges in gold, the past eight months have been rather confusing for the cheaper metal. Admittedly, silver has performed far beyond the predictions of slow witted mainstream skeptics, but it still has not come anywhere near its true potential, especially in light of gold’s incredible strides. Many may be wondering how it was possible for gold to stampede into the $1800 an ounce range after the downgrade while silver stayed completely static at around $40 an ounce. The behavior of commodities markets has been, indeed, very strange…

I wonder what goes through Ben Bernanke’s mind as he sits in his gold plated boardroom in the majestic Marriner Eccles building in Washington DC and decides to screw grandmothers in order to further enrich Wall Street bankers. He just pledged to keep interest rates at zero percent for two more years. Ben is a supposedly book smart man. Does he have no guilt or shame for what he has wrought? How does he sleep at night knowing he has created bloody revolutions around the globe due to his inflationary zero interest policy? People are dying because he has decided that an elite group of Wall Street bankers who recklessly brought down the worldwide financial system in 2008 deserve to be kept alive and enriched at the expense of the many.

After two incredibly volatile weeks, where more Americans now know the ticker symbol for Gold (GLD) than its Periodic Table Symbol (AU), I'm just not sure what to write. Trying to make sense of it all is hard enough, and by this time on a Sunday, what hasn't already been written? I guess I could have tried to write something title "Circular reasoning and cognitive dissidence in the markets" , but that seemed fairly complex. Instead, maybe looking at the past couple of weeks through the eyes of a child, is a better idea.