Credit Crisis

As we pick apart the Facebook offering the BoomBustBlog way...

"Quirky canary-in-the-coal-mine indicator" indicating trouble. 

All you need to read.

What is the bottom line?  The stark decline in the BDI today should be taken very seriously.  Most similar declines have occurred right before or in tandem with economic instability and stock market upheaval.  All the average person need do is look around themselves, and they will find a European Union in the midst of detrimental credit downgrades and on the verge of dissolving.  They will find the U.S. on the brink of yet another national debt battle and hostage to a private Federal Reserve which has announced the possibility of a third QE stimulus package which will likely be the last before foreign creditors begin dumping our treasuries and our currency in protest.  They will find BRIC and ASEAN nations moving quietly into multiple bilateral trade agreements which cut out the use of the dollar as a world reserve completely.  Is it any wonder that the Baltic Dry Index is in such steep deterioration? Along with this decline in global demand is tied another trend which many traditional deflationists and Keynesians find bewildering; inflation in commodities.  Ultimately, the BDI is valuable because it shows an extreme faltering in the demand for typical industrial materials and bulk items, which allows us to contrast the increase in the prices of necessities.  Global demand is waning, yet prices are holding at considerably high levels or are rising (a blatant sign of monetary devaluation).  Indeed, the most practical conclusion would be that the monster of stagflation has been brought to life through the dark alchemy of criminal debt creation and uncontrolled fiat stimulus.  Without the BDI, such disaster would be much more difficult to foresee, and far more shocking when its full weight finally falls upon us.  It must be watched with care and vigilance...

Back in the 1930's, Irving Fisher introduced a concept called the 'debt supercycle.' Simply put, it posits that when there is a buildup of too much debt within an economy, there reaches a point where there simply is no other available solution but to let it rewind. We are at that point in our economy, as are most other major economies around the world, claims John Maudlin, author of the popular Thoughts from the Frontline newsletter and the recent bestselling book Endgame: The End of the Debt Supercycle and How It Changes Everything. For the past several decades, excessive and increasing amounts of credit in the system have allowed us to live above our means as both individuals and nations. We've been able to have our cake and eat it, too. Now that the supercycle has ended and the inevitable de-leveraging cycle is staring us in the face, we will be forced to set priorities in a way that has been foreign to our society for over a generation.

All you need to read.

Presented with little comment except to note that Bloomberg's Chart-of-the-Day highlights specifically what we have been discussing for weeks as in this earnings season, only 47% of companies in the S&P 500 have so far exceeded analyst expectations - the lowest since before the credit crisis. S&P 1300 FTW.

One of the more useful Wall Street fictions is the naive notion that big players and small-fry equity owners alike love low-volatility "melt-up" markets that slowly creep higher on low volume. The less attractive reality is that big trading desks find low-volatility "melt-up" markets useful for one thing: to sucker retail buyers and less-adept fund managers into an increasingly vulnerable market. Beyond that utility, low-volatility "melt-up" markets are of little value to big trading desks for the simple reason that there is no way to outperform in markets that lack volatility. The retail crowd may love a market that slowly gains 4% for the year, barely budging for months, but such a market is anathema to big traders. It's always useful to ask cui bono--to whose benefit? In this case, highly volatile markets don't benefit clueless retail equities owners, as they are constantly whipsawed out of "sure-thing" positions. From the big trading desk point of view, this whipsawing provides essential liquidity, as retail traders and inept fund managers trying to follow the wild swings up and down provide buyers. I have a funny feeling the "smart money" has built up a nice short position here and as a result the market is about to "unexpectedly" decline sharply. The ideal scenario for big trading desks here is a sudden decline that panics complacent retail traders and managers into selling (or leaving their stops in to get hit).

George Soros, speaking at a meeting organized by The Economist, warns all those who are throwing their money into the equity pit, that "the financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis." Advice from Soros or from CNBC. You decide. Reuters reports that Soros said "the same strategy of borrowing and spending that had got us out of the Asian crisis could shunt us towards another crisis unless tough lessons are learned." We hope all those who are buying stocks have very tight stop loss triggers.

What an idiot. It's like saying greed caused the crisis. Ack! Where do they get these people.

Many have wondered just what it was about the past month that has woken up the bond vigilantes from their euro zone slumber, prompting them to suddenly and aggressively punish deficit transgressors. After all, it is not like the massive deficits appeared overnight. Surely had the sovereign bond and CDS widening been more gradual the European authorities would have had no recourse to blame cash and CDS "speculators", whose actions have merely forced the market fundamentals to catch up with reality. Yet due to the sudden move, chaos is rampant, and any minute now 6 scapegoats are expected to be named, in an attempt to deflect anger away from fiscal blunders by various administration officials, whose incompetence is the primary cause for the PIIGS crisis. Morgan Stanley's explanation for the sudden and dramatic move has to do not so much with endogenous fiscal constraints, but more with the ever more prevalent opinion that the giant liquidity pump is coming to an end. Is the market merely pricing in the removal of liquidity and striking at those who will be impacted first when the tide finally starts to recede?

Must read

Part 1

[youtube=http://www.youtube.com/watch?v=Q0zEXdDO5JU&hl=en&fs=1]

Part 2

[youtube=http://www.youtube.com/watch?v=iYhDkZjKBEw&hl=en&fs=1]