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I'm Keeping My Fingers Crossed for a Quiet Summer

But be prepared for something else
Tuesday, June 26, 2012, 11:01 PM

I am hoping for a quiet summer so that all of us north of the equator can enjoy the warm, lazy months of July and August in peace and quiet. But I am concerned that this may not come to pass.

The daily drumbeat of bad news from Europe covers all fronts and is relentless. Rumors abound, confusion reigns, downgrades happen weekly and sometimes daily, unemployment is up, the economy is slipping, and it is entirely unclear if anybody there knows what to do.

Even as the stock markets somehow magically finding their footing on each new rumor turning back at each critical zone of support, while gold continues to languish, I find myself increasingly bearish as all the new data comes in on both the unfolding European credit crisis and the slowing global economy.

Here's the troubling information out of Europe: » Read more


Philip Leara/flickr

Predicting the 'When?' & 'How Far?' of the Next Market Decline

Meet the Coppock Curve
Thursday, June 21, 2012, 5:35 PM

Executive Summary

  • Technical analysis offers methods for identifying long-term trend changes
  • Introducing the Coppock Curve
  • Why the Coppock Curve indicates a coming decline in the equities markets
  • If correct, it may take 8-15 months to hit the bottom of the decline before a recovery begins
  • Global markets are likely to all go down together, making finding "safe havens" more challenging

If you have not yet read Part I: When Will Reality Intrude and the Stock Market Hit Bottom?, available free to all readers, please click here to read it first.

In Part I, we explored the correlation between the stock market and the real economy (tenuous in times of massive intervention) and the probability that the economy’s next trough lies between 10 and 30 weeks in the future.  We then looked to Japan’s Nikkei stock market index as a guide to equities’ performance in eras dominated by debt and deleveraging, and found that the Nikkei’s history suggests a bottom in U.S. stocks could be as far as a year away, in mid-2013.  This aligns with the possibility that the real economy hits a recessionary bottom in late 2012 and the stock market finally reflects that weakness six months later in mid-2013.

As we look at other evidence supporting a significant decline in stocks, we must keep Part I’s caveats firmly in mind:

  1. It’s possible that equities could rise to previous highs or even reach new highs in the near term, despite the recessionary stagnation of real incomes and growth, as stocks tend to be “lagging indicators” of recession.
  2. Massive monetary easing and fiscal stimulus could push “risk-on” assets (such as stocks) higher, even as the real economy weakens.
  3. Global Corporate America could continue generating profits that would support stock market valuations even as the bottom 80% of U.S. households sees further deterioration in their real incomes and balance sheets.

These three factors could support a decoupling of the stock market from the “main street” economy as measured by real (inflation adjusted) incomes and household balance sheets. » Read more


Off the Cuff: The Fed's Increasing Impotence

Analyzing this week's "non-announcement" from the Fed
Wednesday, June 20, 2012, 7:04 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris address:

  • Fed Fizzle
    • Even if/when the Fed decides to inject more liquidity, it's increasingly questionable whether that will have any real impact
  • Europe's Choice: Uncertainty or Panic
    • The day of reckoning is approaching, but Europe is showing us we still have time left to act
  • Crisis Fatigue
    • Don't deviate from your convictions. Just because something is taking longer than you expect doesn't mean it won't happen

The Fed disappointed the herd hoping for more QE (i.e., thin-air money printing) to be announced this week. Asset prices are drifting lower as a result, increasing the already-growing tension in world markets. Meanwhile the contagion in Europe seems to grow worse by the day. Even though it may feel tiring to stay ever-vigilant for a market dislocation, the risk is still worryingly high, so continue to remain on the defensive as best you're able. » Read more


whale05/flickr Creative Commons

"More Stress Is Needed"

Wonderland logic now rules
Tuesday, June 19, 2012, 7:00 PM

After Alice fell down the rabbit hole, nothing made sense anymore. A new logic reigned, and she had to adapt to it as readily as she could. Talking cats that disappeared except for their grin, caterpillars perched on magic mushrooms, and other oddities had to be encountered and dealt with.

Similarly, we find ourselves suddenly confronted with a fantastical menagerie. Such as the formerly inconsequential Greek interparty political wrestling matches becoming of critical importance to the fate of the entire world banking system, stock markets mainly discounting the likelihood and size of the next round of magic money-printing, a world that has decided Spain’s 6% deficit matters a lot while the US’s 8% deficit doesn’t matter at all, untrustworthy institutions that just abscond with client money without charge, and stock markets that are now mostly in the hands of robot machines trading in sub-millisecond cycles.

The signs of distress are obvious. The old forms of logic no longer work and the new logic cannot be traded reliably, as it owes its direction to pulses of fresh money and gyrating sentiment. All asset classes trade in lockstep, with nowhere to run and nowhere to hide. It’s either risk on or risk off, and knowing which might prevail at any given moment is now a 24/7 occupation, and a risky one at that.

The entire stock market is now simply living off of expectations of the future quantitative easing (QE) efforts, with another decision or announcement expected tomorrow at 2:15 EST.

This is the world we live in now, and hardly anybody even questions it anymore. » Read more


Steve Snodgrass on flickr

The Most Predictable Next Events

Don't believe everything the pundits are saying
Monday, June 18, 2012, 4:00 PM

Executive Summary

  • Why Greece is unlikely to release a new drachma
  • Why globally-coordinated money printing is the most likely resolution to the Greek & Spanish crises
  • Why the magnitude of derivative risk makes a Eurozone collapse much more frightening
  • Why capital flight will get worse, and why gold will benefit from this
  • Why Germany's odds for leaving the Eurozone are lower than most assume
  • Why the time left before extreme action must be taken is than a few months - possibly only weeks

If you have not yet read Part I: Abandoning Ship, available free to all readers, please click here to read it first.

Here are some key points to bear in mind as the crisis progresses:

Greece: new drachma?

The Greeks would be crazy to embrace a new drachma, as recommended by neoclassical economists. A new drachma would be backed by nothing, unless it comes with full convertibility into Greece’s 111.6 tonnes of gold, assuming that actually exists. The complete lack of faith in any Greek government’s economic credentials would mean a new drachma in the absence of gold convertibility would rapidly descend towards its intrinsic value, which is zero. Interestingly, recent polls suggest that the Greek people understand this and prefer to remain with the euro.

The legality of changing deposits from euros to drachmas is highly questionable. Assuming the Greek government can force this through on domestic deposits that will leave an open question over loans, likely to be challenged through the courts. And in the past non-Greek banks lending money to Greek businesses have as a matter of course stipulated contracts to be governed by the laws of another jurisdiction.

Message: do not buy into the siren attractions of an independent drachma... » Read more


Off the Cuff: Contagion Within Europe

Europe's leaders are resorting to shoddy number tricks a 4th
Sunday, June 17, 2012, 6:15 AM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris discuss:

  • Desperate Measures
    • The math behind the latest 'rescue' attempts is so broken it falls apart at first glance
  • How Much Time Do We Have Left?
    • The day of reckoning is approaching, but Europe is showing us we still have time left to act
  • Where to Park Capital
    • The options worth considering grow fewer in number, though Europeans should take action soon

Europe continues to figure prominently in Chris and Mish's minds at the moment. The action there is what's driving the world agenda right now, and the decisions taken to address the European crisis will have tremendous impact on the financial markets around the globe. Much is happening right now -- but for longtime 'Off the Cuff' listeners, it's important to keep in perspective that little has actually changed. Europe's problem is a mathematical one. Too many bad loans were made. In practically every country. Steep losses will need to be taken. Taking those losses will place painful deflationary pressure on asset prices. The key question is: how much new money will central banks print to service and retire those debts?...


NASA Goddard Photo and Video on flickr

Bailout Fatigue: The Spanish Bump and Slide

The power of rumor to move the markets is waning
Monday, June 11, 2012, 2:16 PM

A while back, I briefly introduced the idea of crisis fatigue, the condition where one tires of the persistent low-level crisis that infests the corners of one's daily experience to the point that doing something, anything else, becomes an attractive proposition.

Now the entire globe is experiencing bailout fatigue, as evidenced by the lifespan-of-a-mayfly duration of the market pops that follow each new bailout announcement.

The most recent example is the 'bailout' of Spanish banks, first leaked and then 'announced' over the weekend to great hoopla and fanfare. The only problem was that no details came along with the announcement.

Where would the money come from, under what terms, and when? Such information was just not available.

The result? A massive futures spike in the global stock markets that did not even last a day: » Read more


DonkeyHotey on flickr

Off the Cuff: Building Bailout Rumors

All eyes are turning to the Fed to bailout Europe
Thursday, June 7, 2012, 11:55 AM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris tackle:

  • Rumors of Bailouts in Europe
    • Germany looks like it may be willing to compromise, and many pundits are hinting that the US may pitch in.
  • A 'Nannycrat' Future for the EU 
    • The clamor for more central authority is increasing, but will the populace vote for it?
  • A New Drachma Backed by Silver?
    • An interesting proposal worth considering...

The situation in Europe continues to drive market sentiment, as does increased speculation that -- to prevent contagion from crossing the Atlantic -- the Fed is preparing to ease again. With all of the machinations being discussed, there really is nothing new in terms of actual progress. The proposals being considered (like the new Spanish "FROB") are simply shell games designed for optical purposes, nothing more. The key question remains unanswered at this point: Who will take the colossal losses on Europe's bad debts? » Read more


The Deleveraging Pain Is Just Beginning

How far does deleveraging have to go?
Tuesday, June 5, 2012, 1:28 PM

Executive Summary

  • How much have households, corporations, and the government combined deleveraged since 2008? (Barely at all.)
  • Have our national debt-to-income ratios improved since 2008? (No, they've gotten worse.)
  • Increasingly, unlevered assets will be sold to maintain the phantom value of levered assets.
  • Ultimately, levered losses will need to be taken. Cash and cash equivalents will be in high demand as this happens.

Part I: The Pernicious Dynamics of Debt, Deleveraging, and Deflation

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Deleveraging Pain Is Just Beginning

In Part I, we sought an understanding of the causal linkages between debt, deleveraging, and deflation. In Part II, we analyze the key data and charts to get a better understanding of how far deleveraging has to go.

The basic idea in deleveraging is that debt exceeds the value of the underlying asset—for example, a mortgage exceeds the value of the home. The difference must be made up with savings from income or from the sale of other assets, or the asset must be sold and the loss booked.

In the case of consumer and government debt, the underlying assets are, in effect, future income and future tax revenues. The student has no assets to sell to pay off a student loan; the loan was leveraged off future income. The same is true of government bonds.  Though consumers often maintain that the goods they bought on credit have retained value, in many cases the market value of items bought on credit is far below the debt still to be paid.

The situation is thus dire for loans without underlying assets that can be sold. Cash to service these loans must be raised by selling other assets or by diverting income.

I see the forces of debt, deleveraging, deflation, and inflation (money-printing) as positive (self-reinforcing) and negative (countervailing) feedback loops; the interactions are complex and can oscillate in dynamic equilibrium until a crisis pushes the system firmly into disequilibrium.


Buckle Up - Market Breakdown In Progress

It's not looking good
Friday, June 1, 2012, 9:17 AM

The markets are now entering a new phase of deterioration as reality swamps the near-heroic efforts of the central planners to prop, cajole, and rumor-lift the financial markets into something, anything that might inspire confidence and at least appear healthy.

I say 'near heroic' instead of simply 'heroic' because there is nothing at all heroic about trying to produce prosperity without producing anything besides words and electronic credit. It has never worked before and is not going to work this time.

The entire strategy of the world's central bankers can be distilled to the phrase "delay and pray."

Well, things have been forestalled, but the praying has not worked, as the world economies failed to re-enter the type of robust growth required to support all prior debts plus enable the necessary continuation of additional credit accumulation. » Read more