I See Some Dandruff…Head and Shoulders Top Confirmed

Wednesday, June 30th, 2010

The S&P has confirmed a head and shoulders top that projects down to 840. Check out the chart below:

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Fiscal Crises and Imperial Collapses: Historical Perspective on Current Predicaments

Monday, June 28th, 2010

I highly recommend everyone watch this video and read the presentation….

It is long and a little dry but very worthwhile if you want understand economic history and how we are repeating it. The presentation contains a ton of charts and graphs.

Niall Ferguson gives a historical perspective on the current financial crisis:

Ferguson Presentation

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Paul Krugman Throws In Towel, Says We’re Headed For Another Depression

Monday, June 28th, 2010

I happen to agree that we are in huge trouble…

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Deflation Back On The Table

Sunday, June 27th, 2010

I have maintained for the last 6 months that we would see more deflation and it look as if it is finally coming home to roost. Check out a few of my blog posts back from earlier this year:

Trouble In The Markets…Inflation I think Not

Can You Spell D-E-F-L-A-T-I-O-N

Look For New Yearly Lows on Equities

In addition the Fed came out this week and told us that inflation was declining. Check out this article below from Saturday’s FT:

Something odd happened this week. The US Federal Reserve, the world’s most powerful central bank, volunteered that inflation was coming down.

This was not the week’s most dramatic event. Only Fed-watchers, used to parsing every word, will have noted that the words “underlying inflation has trended lower” appeared in the Fed’s communiqué this month, having been absent when it last pronounced on monetary policy in April.

But all central bankers hate admitting that inflation is not a problem. Those five words had an impact on markets, and crystallised a concern that has been growing during the past few months. During the worst of the financial crisis in late 2008, there was already a fierce debate over whether inflation or deflation was the greatest danger for the economy. As the world has steadily recovered from crisis conditions, investors have worked on the assumption that the inflationists were right – that the greatest danger was runaway inflation, not a fall in prices. Now they are worriedly reconsidering that judgment.

The issue matters, a lot. Inflation and deflation require almost totally different responses, both from investors and from governments.

It is also hard to resolve as both sides have logic and historical precedent on their side. Print money and resort to deficit financing and inflation will result. That has happened in numerous developing countries. It also afflicted Germany’s Weimar Republic in the early 1920s, and most of the western world in the 1970s.

But economic theory also predicts that a debt binge will lead to deflation. As individuals and companies realise that they are over-indebted, so they pay down their debt, spend less and prices fall. Falling prices suck down economic activity with them. There are precedents in the US of the early 1930s, and Japan in the 1990s. Both followed the bursting of epochal asset price bubbles – as happened two years ago.

Inflationists argue that governments have over-learnt the lessons from these disasters, and that so much money has now been printed that inflation is inevitable. Deflationists argue that Japan eventually cut interest rates to below zero, and still found itself trapped.

At first, inflationists seemed to win. Emerging markets surged back, led by China, and commodity prices rose with them. Gold, long an inflation hedge, set new highs, in nominal terms.

Now worries about deflation are back, thanks to a number of factors. The Fed’s pronouncement reflects the fact that core inflation in the US, stripping out fuel and food, is at its lowest since 1961. When Lehman Brothers went down in the autumn of 2008, it stood at 2.5 per cent; now it is 0.9 per cent.

Employment numbers refuse to improve at anything like the pace that had been hoped. US housing appears to be returning to the doldrums now tax incentives to buy homes have expired. The latest leading economic indicators suggest a “double dip” recession for the US is on the cards. And all of this, critically, has happened after the authorities administered the economic equivalent of an injection of adrenaline.

Thus, as the chart shows, investors have started to push down their expectations for inflation in the US over the next decade. As far as the market for inflation-linked bonds was concerned, expected inflation was never higher than in the months before the crisis.

Source: http://www.ft.com/cms/s/0/58835568-80b9-11df-be5a-00144feabdc0.html

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Predictions of A Bond Market Bubble Are Wrong

Tuesday, June 22nd, 2010

Here is a great article I found in the Financial Times today. David Rosenberg has been right on in his analysis over the past few years and continues to be in the minority in suggesting that we have more deflation ahead rather than inflation. His thoughts are always interesting and most diverge from the mainstream Wall Street party line. I continue to favor his analysis until he is wrong and/or I can see it differently myself. Thus, until proven otherwise deflation persists.

Predictions of a bond market bubble are wrong

By David Rosenberg

Published: June 21 2010 22:36 | Last updated: June 21 2010 22:36

I find it truly amazing to see how many pundits refer to the bond market as if it is in some sort of a bubble. How can a security whose price is constantly projected to decline by the economics community be in a bubble? How can any asset class be in a bubble where the capital is guaranteed and which pays out a coupon twice a year? It makes no sense.

Of course, the retort is that retail investors have been ploughing money into bonds and bond-equivalents en masse, choosing fixed-income securities even in the face of a pronounced bear market rally in equities. What is rarely mentioned is that the median age of the 78m baby boomers is 54 and even after two bubbles bursting in less than a decade, about 30 per cent of the US household asset mix is represented by equities and real estate apiece and only six per cent is in bonds. The demographic drive towards capital preservation and income orientation and away from capital appreciation strategies looks to be a secular theme. As such that small share of the asset pie that is in bonds and equivalents is likely going to continue to expand over time.

Looking at the outlook for Treasuries, the point must be emphasised that supply alone has been an inadequate focus for predicting future prices/yields. The 30-year Treasury bond yield went from 4.7 per cent to 6.7 per cent in 1999 even though the federal budget was in surplus and new issuance non-existent, and the dramatic decline in JGB yields over the past two decades even in the face of a spectacular deficit financing binge that has left the country with a 200 per cent gross debt-to-GDP ratio. Last I saw, the 10-year JGB yield was hovering near 1.2 per cent.

The problem in trying to assess either supply or demand is that everything seems so confusing in the early stages of this new secular paradigm of a global credit collapse. There is no way to get it completely right – the contraction in household and business credit bumping the rapid expansion of public sector deficits as losses are socialised and debts from the private sector get transferred to the public sector balance sheet. The bottom line is that in all levels of society, and across most countries in the industrialised world, there is still far too much debt and debt-servicing relative to income-generating capacity. Extinguishing this debt will be deflationary even as central banks are forced into further dramatic actions to cushion the blow.

History shows that deleveraging cycles typically last as long as seven years, and we have just completed year number two – at a time when most measures of underlying inflation are less than 1 per cent.

Indeed, it makes perfect sense to assess the outlook for inflation as the primary effort in predicting Treasury rates, especially since the correlation is twice as large as for fiscal policy alone. Or perhaps instead of inflation, we should really be discussing deflation, which has emerged as the primary trend and governments have few bullets left to deal with it.

It still seems that inflation is what is on the minds of the bond-bubble enthusiasts, perhaps because practically everyone has spent his or her professional lives living with it. The double-digit inflation days of the 1970s and 1980s are still not that far removed from everyone’s psyche.

Outside of wars, deflation is the norm, not the exception. The exception has been the experience of the post-second world war era. It is remarkable how so few people in the financial industry get it.

The US inflation rate peaked in 1980 at nearly 15 per cent. By the summer of 2007 it was down to 3 per cent. It fell dramatically even though the number of baby boomers exploded. The aggregate non-financial debt to GDP ratio surged from 135 per cent to 220 per cent over this period and yet the inflation rate collapsed by 12 percentage points. The reason were all classic supply-related shocks – globalisation, capital deepening, massive gains in technology, productivity, freer trade, lower marginal tax rates – which spurred the trend towards secular disinflation.

But in mid-2007, the secular credit expansion came to a thundering halt. Deleveraging is the new secular trend. Inflation is down to 2 per cent and the core rate of inflation is 90 basis points below zero. Imagine that when the oil price was at $10 a barrel back in 1998, the core inflation rate was 2.5 per cent and today at $75 a barrel the rate is below 1 per cent. The situation now is one of debt destruction, not debt expansion, and it is only a matter of time before we see prices in aggregate start to deflate.

We are not talking about 10 or 20 per cent price declines – more like 2 to 3 per cent. But enough to jeopardise the lofty earnings estimates embedded in equity market valuations, enough to thwart the progress needed to resolve our intractable deficit and debt problems, and enough to take bond yields back to their 2008 microscopic lows.

The writer is chief economist and strategist at Gluskin Sheff & Associates

Financial Times

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Elliot Wave predicts triple-digit Dow in 2016

Friday, June 18th, 2010

Bob Prechter of Elliott Wave International is predicting a massive deflationary spiral that he says is already underway and will take us down to triple digits on the Dow Jones Industrials by 2016. Here is an excerpt from the article:

“Stock market bulls and most economists think that a new bull market and economic recovery are underway. Most bears are looking for either a long sideways bear market à la 1966-1982, or a hyperinflationary run to infinity. Our Elliott Wave outlook opposes both of these scenarios. The most likely profile is a stock market crash of historic proportions.”

Elliott Wave Theorist offers several reasons, including: “This bear market is of Supercycle degree, the biggest since 1720-1784. It should therefore include a decline deeper that the 89% decline of 1929-1932. A decline of 91.5% or more would carry it below 1,000.”

There will be a short-term rally at some point, thinks Prechter, but it will be a trap: “The 7.25-year and 20-year cycles are both scheduled to top in 2012, suggesting that 2012 will mark the last vestiges of self-destructive hope. Then the final years of decline will usher in capitulation and finally despair.”

Source: www.marketwatch.com

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The Bear Case: Time to Slip into Something Less Comfortable?

Monday, June 14th, 2010

Business Week put a great article on June 10th about the bearish forecasters that correctly predicted the 2008 crash. The article suggests that for the most part that they are all still bearish. It is a must read…

www.businessweek.com

The article reference these notable bears:

Michael Panzner
Nouriel Roubini
Peter Schiff
Robert Prechter
Nassim Taleb
Gary Shilling
Meredith Whitney
Stephen Roach
David Rosenberg
Jim Grant
Jeremy Grantham

Source: www.businessweek.com

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Naseem Taleb: Bank Balance Sheets Still Bad

Monday, June 14th, 2010

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The Next Big Play: Nat Gas

Thursday, June 10th, 2010

With the massive offshore drilling disaster that just won’t go away Americans need to find a new source of energy and quickly. Natural Gas has been touted by Boone Pickens for the last few years and it now seems that the Obama administration has finally taken note. Last week in a press conference he made a noted change in policy referring to Natural Gas as a more likely energy source going forward. That signifies a significant shift in policy towards natural gas. As such, I think natural gas could be the next big market mover.

I would look to get long the natural gas futures or the UNG, which is the natural gas tracking stock. I also like Chesapeake Energy Corp as direct beneficiary. Here are the charts of natural gas and Chesapeake:

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May Went 22 Days Without 2 Up Days In A Row and What It Means

Wednesday, June 9th, 2010

The month of May went 22 days in a row without having 2 consecutive up days in a row, the 13th time that has happened in history. During the past 12 prior occasions the returns following such an event have not been stellar:

Here is a table showing the other 12 times in history and performance following the event:

Check out the graph of the past 10 years and the occurrences of this event and notice only one of them bottomed shortly after it occurred. The rest continued their slide lower.

Source: Schaeffer’s Research

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