The economic news has turned decidedly negative globally and a sense of ‘quiet before the storm’ permeates the financial headlines. Arcane subjects such as a Hindenburg Omen now make mainline news. The retail investor continues to flee the equity markets and in concert with the institutional players relentlessly pile into the perceived safety of yield instruments, though they are outrageously expensive by any proven measure. Like trying to buy a pump during a storm flood, people are apparently willing to pay any price. As a sailor, it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talgking as everyone is checking preparations for any eventuality. Are you prepared?
What if this is not a squall but a tropical storm, or even a hurricane? Unlike sailors, the financial markets do not have the forecasting technology for protection against such a possibility. Good sailors before today’s technology advancements avoided this possibility through the use of almanacs, shrewd observation of the climate and common sense. It appears to this old salt that all three are missing in today’s financial community.
Looking through the misty haze though, I can see the following clearly looming on the horizon.
Since President Nixon took the US off the Gold standard in 1971, the increase in global fiat currency has been nothing short of breath taking. It has grown unchecked and inevitably has become unhinged from world industrial production and the historical creators of real tangible wealth.
Do you believe trees grow to the sky?
Or, is it you believe you are smart enough to get out before this graph crashes?
Apparent synthetic wealth has artificially and temporarily been created through the production of paper. Whether Federal Reserve IOU notes (the dollar) or guaranteed certificates of confiscation (treasury notes & bonds), it needs to never be forgotten that these are paper. It is not wealth. It is someone else’s obligation to deliver that wealth to the holder of the paper based on what that paper is felt to be worth when the obligation is required to be surrendered. It must never be forgotten that fiat paper is only a counter party obligation to deliver. Will they?…
I met with Yves Smith of Naked Capitalism on the weekend, at a superb Japanese restaurant that only New York locals could find (and I’ll keep its location quiet for their benefit–too much publicity could spoil a spectacular thing). Yves was kind enough to post details of my latest academic paper at her site in a post she entitled “Steve Keen’s scary Minsky model“.
Yves found the model scary, not because it revealed anything about the economy that she didn’t already know, but because it so easily reproduced the Ponzi features of the economy she knows so well.
I have yet to attempt to fit the model to data–and given its nonlinearity, that won’t be easy–but its qualitative behavior is very close to what we’ve experienced. As in the real world, a series of booms and busts give the superficial appearance of an economy entering a “Great Moderation”–just before it collapses.
The motive force driving the crash is the ratio of debt to GDP–a key feature of the real world that the mainstream economists who dominate the world’s academic university departments, Central Banks and Treasuries ignore. In the model, as in the real world, this ratio rises in a boom as businesses take on debt to finance investment and speculation, and then falls in a slump when things don’t work out in line with the euphoric expectations that developed during the boom. Cash flows during the slump don’t allow borrowers to reduce the debt to GDP ratio to the pre-boom level, but the period of relative stability after the crisis leads to expectations–and debt–taking off once more.
Ultimately, such an extreme level of debt is accumulated that debt servicing exceeds available cash flows, and a permanent slump ensues–a Depression.
There are 4 behavioural functions in the model that mimic the behaviour of the major private actors in the economy–workers, capitalists and bankers. Workers wage rises are related to the level of employment and the rate of inflation; capitalists investment and debt repayment plans are related to the rate of profit; and the willingness of banks to lend is also a function of the rate of profit.…
Thousands of police officers have been laid off all across America since the current economic crisis began. Thousands more are getting ready to be laid off. So could we be on the verge of a new era of chaos and anarchy in America as crime runs wild and there are just far too few police to respond to it all? That is the message that one blood-smeared billboard in Stockton, California is trying to get across. Paid for by the Stockton, California police union, the message of the billboard is chillingly clear: "Welcome to the 2nd most dangerous city in California. Stop laying off cops." As state, city and local governments across the United States continue to be devastated by the ongoing economic crisis, budget cuts are becoming much deeper and police forces have suddenly become a very popular target.
Officer Steve Leonesio, the president of the Stockton Police Officers Association, has announced that the police union plans to spend approximately $20,000 on at least 20 more billboards.
Why is the union putting up all of these billboards?
Well, it turns out that Stockton has been considering a plan to lay off 53 police officers in an effort to eliminate a $23 million budget deficit.
But law enforcement in Stockton has already been cut to the bone. Recently, the Stockton Police Department dropped this bombshell….
"We absolutely do not have any narcotics officers, narcotics sergeants working any kind of investigative narcotics type cases at this point in time."
Do you think drug dealers will be flocking to Stockton after they hear that?
But the truth is that so many of these local governments around the nation are just flat broke at this point.
Even major cities are having to admit that they have accumulated such large debts that they cannot even afford to provide the most basic services any longer.
In Oakland, California the battle over police layoffs has made national headlines over the past couple of weeks. Oakland has laid off 80 police officers, and now the police chief says that there are some crimes that his department simply will not be able to…
This relatively boring hearing suddenly turned exciting when Congressman Kevin Brady asked Tim Geithner to step down. The economic team that President Obama put in place (primarily Geithner and Summers) has been largely responsible for the current predicament. This is not to imply that the Republicans and President Bush did not play an equal (or greater) role in the economic crisis, but it’s truly astonishing that the people who helped cause this crisis are the same ones who are attempting to steer us out of it:
A recent piece of research from JP Morgan touches on some frequently asked questions by investors. I’ve provided their responses along with my own:
1) Is the crisis over?
The financial crisis is largely over. The economic crisis, only half so. The recession is over but the recovery has just started. Even the above-trend growth pace that we project for this recovery will require years to get us back to trend levels of activity. This means high unemployment and disinflationary pressures over the next two years.
I have to agree with JP Morgan here. The crisis and the days of 700 point Dow drops are long gone. But the recovery is going to feel a lot like a recession. In other words, jobs are going to be slow to come back, the consumer is going to be sluggish while stocks and the housing market are likely to be range bound for years. What JP Morgan doesn’t mention is that most of our long-term structural problems still exist. Wall Street is back to their old tricks while the consumer struggles under a mountain of debt, job losses and stagnant wages. The Fed is trying their best to keep the boom/bust market alive and well. More likely than not, they are simply inflating the economy in preparation for the next bust. Two years is likely a generous timeframe for the end of our secular problems.
2) Is the recovery sustainable?
Yes, odds are it is given unprecedented and synchronized global policy stimulus, low funding costs, a repaired financial system, and the massive need for inventory rebuilding into next year. What are the main risk factors we should monitor? For the recovery in the world economy and in risky assets to be sustained, the private sector will need to take the baton from the public sector. Corporates are in the driver’s seat here. We need to see them move from a precautionary into an expansionary mode. That means capital spending, jobs, and income creation. Watch these.
A potential Head and Shoulders top has formed. It will be a valid formation but the objective will not be activated until and unless the neckline is broken.
Volumes remain light, with lots of technical gamesmanship that contributes to quite a bit of volatility in the short term, aka a ‘daytrader’s market.’
There is quite a bit of ‘tension’ in the market ahead of the GDP report tomorrow. The consensus is for growth of 1.5%. We are still a couple of weeks short of the timeframe we have projected for a top and the beginning of a leg down in markets, but some data or exogenous surprise could accelerate this.
There is a de facto partnership between the government and the banks with regard to the financial system and the economy which is spilling over to the equity markets. This is a similar arrangement that brought us the housing bubble and the credit crisis after the tech bubble and crash of 2001, which itself was a reaction to the Asian and Russian currency crisis of the late 1990′s.
The financial engineers will likely not abandon their efforts until they either succeed, or finally shake the real economy apart and destroy the US financial system and currency. How they define ‘success’ is likely to be stability at the price of freedom, a classic oligarchy with ‘enlightened despots.’ Their financial engineering will require ever greater control over policy and priorities to maintain its artificial equilibrium.
The banks must be restrained, the financial system reformed, and the economy brought back into balance before there can be a sustained recovery.
In a break from tradition, instead of the typical Friday gain we instead got another round of selling; negating the bullish setup from Thursday. To add insult to injury, volume climbed to register distribution. The S&P finished on the rising trendline, but just below 20-day MA. Technicals show bearish MACD, On-Balance-Volume, and ADX trend. The 50-day MA could be the last chance saloon for a breakdown. The Nasdaq is caught in the middle of its rising wedge. So while it was rebuffed at 5096, it still has 5038 support, 20-day and 50-day MAs. ...
As previously reported by both IMF and Greek sources, Greece now has less than a week before it defaults on its June 5 payment to the IMF, a payment which it can't make simply because it run out of money even before its last "payment" to the IMF on May 12.
To be sure, Greece does have two options to kick the can yet again: one, of course, is to get a deal done in the coming 5 days ...
When policymakers turn to economists for guidance, they expect the advice they receive to be grounded in science, not academic factionalism or political presuppositions. After all, the policies they will be putting in place will have real implications for real people. Unfortunately, however, sound science is not always the driving force behind economic analysis and policy recommendations.
In a recent critique of what he calls the “mathiness” of modern economics, Paul M. Romer of...
Could the S&P 500 be pulling a repeat of the 2000-2007 topping process?
The chart above reflects that the tops in 2000 & 2007 were 7 years and 7 months apart. Is it possible that another top is taking place 7 years and 7 months from the 2007 high? As the S&P is facing this potential time window repeating pattern, it is also staring the Fibonacci 161% Extension resistance level based upon the 2007 highs and 2009 lows, at the top of a rising wedge.
Is the S&P the only market facing a breakout test? The chart below takes a look at the white hot DAX index.
Early last week, stocks broke out, with the S&P 500 setting a new high with blue skies overhead. But then the market basically flat-lined for the rest of the week as bulls just couldn’t gather the fuel and conviction to take prices higher. In fact, the technical picture now has turned a bit defensive, at least for the short term, thus joining what has been a neutral-to-defensive tilt to our fundamentals-based Outlook rankings.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the t...
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Understanding the new normal of a business model is key to the success of any company. The managment of companies need to adapt to the changing demand, but first they must recognize what changes are taking place. Big Pharma's business model is changing rapidly, and much like the airline industry, there will be but a handful of pharma companies left at the end of this path.
Most Big Pharma companies have traditionally done everything from research and development (R&D) through to commercialisation themselves. Research was proprietary, and diseases were cherry picked on the back of academic research that was done using NIH grants. This was in the heyday of research, where multiple companies had drugs for the same target (Mevocor, Zocor, Crestor, Lipitor), and could reap the rewards on multiple scales. However, in the c...
Bitcoin, the virtual digital currency, has been called the future of banking, a dangerous fad, and almost everything in between, but we're finally about to get some solid data to help settle the debate.
On Monday, the Nasdaq (NDAQ) stock exchange said it would ...
Chris Kimble likes the idea of shorting the US dollar if it bounces higher. Phil's likes the dollar better long here. These views are not inconsistent, actually, the dollar could bounce and drop again. We'll be watching.
Phil writes: If the Fed begins to tighten OR if Greece defaults OR if China begins to fall apart OR if Japan begins to unwind, then the Dollar could move 10% higher. Without any of those things happening – you still have the Fed pursuing a relatively stronger currency policy than the rest of the G8. So, if anything, I think the pressure should be up, not down.
UNLESS that 95 line does ultimately fail (as opposed to this being bullish consolidation at the prior breakout point), then I'd prefer to sell the UUP Jan $25 puts for $0.85 and buy the Sept $24 call...
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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