A Decade's Worth of Returns

From 1 January 2000 to 31 December 2009

On Deck for January 2010: 1060 or 1160 in the SP 500?

Here is a slightly different view of the SP 500 daily chart, showing potential retracement levels if it breaks down.

Try not to get in front of the move. This market is 70% program trading again.

Bonne Heureuse Année mes amis


SP 500 March Futures with Fibonacci Retracements (if there is a serious correction)



Longer Term View of the SP 500



And Then There Is Tech..



VIX: Back to Complacency
As a dog returns to its vomit, so a fool repeats his folly.

For last year's words belong to last year's language
And next year's words await another voice.
And to make an end is to make a beginning.

T.S. Eliot, Little Gidding

The banks must be restrained, the financial system reformed, and balance restored to the economy before there can be any sustained recovery.

Ghosts of 1987

I am a 'fan' of very few people in the money business. One of my favorite pundits is a frequent guest on Bloomberg Television, which I tend to watch off and on during the day on my computer screen: Joe Saluzzi. Another person for whom I always turn up the volume is Howard Davidowitz, the savvy and no-nonsense retail analyst.

Here is Joe Saluzzi's excellent explanation for the 'odd' market behaviour which many traders have noted to me in the past few weeks.

But it was not until today that it 'clicked' in my mind that this is setting up like the market crash of 1987, for purely technical reasons. The volumes are so hugely dominated by 'high frequency systems trading' that if and when a dislocation occurs, and it may only take something trivial to set it off when the time comes, the market will gain a moementum to the downside that the government may not view so favorably and dismissively.

And in response to such a meltdown, one of the first things the Poseur-in-Chief might consider doing is replacing the current head of the SEC, Mary Schapiro, who has managed to become almost as useless as Christopher Cox, the SEC head under Bush. Granted, the SEC is an awful place to work, rubbing shoulders with the wealthy on a meager government salary while every swinging Congressman cuts your funding when not making personal calls to protect their campaign contributors. But really, the people of the US deserve much better from their government than franchised looting and organized mispricing of risk. It really is becoming that blatant.

How to Trade

"A reporter once asked me what were my most important attributes as a speculator. I replied, 'Nerve...it takes nerve to speculate in futures...and being stubborn, refusing to be satisfied with small profits. But it does not matter if they are paper profits when you lose them..when you lose you sweat blood. Confidence in yourself is something you must have if you are going to be a successful speculator.

To be able to stick in a risky position without shattering your nerves, you must have a continuing confidence in the judgment that caused you to take that position in the first place.' I knew that I would never get rich by scalping the markets for small swings, so I was constantly striving to sense the broad swings of the markets and to understand the reasons for them.

The way to make money is to be slow in taking profits. Let your profits pile up as high as they would go. This is the way to reduce the odds against you --- by consistently holding on when a market is running favorably for you.

My main strength was in my ability to take a position and stick with it.

I was never an in-and-out trader. (A friend said, 'He got in at the beginning of a long bull market, and he stuck, and stuck, and stuck.') I have overstayed markets at times, but this is not, for me, really a failing. Because most of my success has been due to my hanging on while my profits mounted. There is the big secret. Do with it what you will."

Arthur W. Cutten, the commodities trader from the 1920's.

Of course all great traders will tell you the same thing essentially. Find your bull market and then hang on to it, never losing your positions completely. If you have a mind to it you can buy weakness and sell some on strength to improve your cost basis and for tax purposes, but only if you hold the position while the bull market is intact.

Jesse Livermore said the same thing. "The market does not beat them. They beat themselves, because though they have brains they cannot sit tight."

As you may recall, Arthur W. Cutten eventually went into a decline, because he did not follow his own advice. Also, most traders develop 'difficult' personalities and occasional medical problems because of the continuing stress of the markets, and eventually fall into some personal decline and habits that have a negative effect on their trading. Jesse Livermore was one of these. Some start thinking they are bigger than the markets, and lose their edge and take the big hit and never recover, as in the case of 'tech bull' William C. Durant.

The best gains I have ever made have been in positions held for a long bull market, some of which I still hold.

The greatest quick gains I have made were by being short in an obviously declining market. The profits are fabulous. They are too good. Being short the market is an occasional thing, less than 20% of the time is a short position appropriate. But the gains are so intoxicating that the bearish trader can never sit tight and wait, and fritters away those big gains in the long drifting markets through small losses and transaction fees.

People who have lost their positions in a bull market completely will try to shake you out of yours; misery loves company, and there is nothing more miserable than to have been right, but then to have outsmarted yourself and lost your place, and not profited from what you had known is right. And the agony of the decision of when to buy back can be quite stressful.

Find your bull market, understand why it is valid, a genuine article, and then stick with it until it is no longer valid, even through corrections which all bull markets must experience. This requires you to develop some basic knowledge of trends and charts. Would your drive if you did not know how to read a map?

Most people, about 95% or so, cannot trade actively even on weakness and strength, and should stick to the long trends in markets only, sitting out in cash when appropriate. Emotions are powerful things, and can cause the mind to rationalize almost anything, any data. Nevery try to be the first in or the last out of a trend.

The market makers and insiders can see what you are holding and have better access to capital and information than you can have. Trying to beat them in the short term is foolishness, even though you might get lucky for short periods of time, you will give it all back and more.

Most people's opinions on the markets are worthless, even damaging, because they run with the herd, or may be jealous of your success and wish to drag you down into their own perceived personal failures. If a person cannot show data that you understand to justify their position, even after you query them and they explain it, then ignore them, because they do not know anything useful, even though they may claim great results, and show the occasional 'hit' in their calls.

Making incessant market calls are a way for failed traders to try and get back some of their broken ego. They will write their successes in marble, and their failures in sand. Making a bad market call and then repeatedly revising it, and revising it, to eventually be correct is the worst sort of self-deception.

There is no greater waste of time than trying to find the perfect system, a mechanical means of predicting the future. Look for the big trends, and then learn to patiently trade them with sound money management and a willingness to learn from the market and new information.

This is what I consider to be the 'secret' of being a successful trader.

And nine tenths of it is not in the knowing, but in the discipline of doing it, day in and day out. Mastering your self, your ego and emotions, even boredom, is the greatest challenge to successful trading, and it never ends.

Total Government Debt as a % of GDP in the US

A gift for the children and the rest of the world...



It's a good thing that Reagan proved that deficits don't matter.

Especially when you go to enormous lengths to shift the burden to someone else and hide the debt off balance sheet.



Monetization in action

SP 500 March Futures Daily Chart

Starting to paddle a bit...slow rolling into the year end looking for some cool buds and a tasty wave.

This could get nasty, 'cause the VIX is driving on 'ludes.

Eric Sprott thinks the SP500 will retest the lows as the economic recovery does not materialize in the US.

I will keep an open mind about this forecast, but act slowly having been surprised in the past by the Fed's ability to throw caution to the wind and levitate the stock market from 2003 through 2007, while inflating an enormous housing bubble as a side effect.

Will there be a new asset bubble and carry trade? It is possible.



Nasdaq 100 March Futures

What Will the World Reserve Currency System Become? The Stakes Are Enormous

The deterioration of the dollar reserve currency regime is obvious.

If we have forecasted correctly, the world will look to some variation of the IMF's Special Drawing Rights as an eventual replacement for the US dollar. Therefore, the recomposition of the SDR next year will become a lightning rod for the global stresses created by an increasingly unstable and impractical system of global trade.

As you may recall, Russia and China have called for the inclusion of more currencies such as the rouble, the yuan, the Aussie and Canadian dollars, and gold and possibly silver into the mix. The BRIC's seem determined to break the western dominance of global monetary policy.

This may also explain some of the highly emotional,and we would say nonsensical, arguments attacking gold and silver by some of the house economists for the western Banks, and their camp followers and hand puppets in the universities, of late.

The bankers are appalled at the prospect of the new SDR including gold or silver in its new composition to be set in 2010. And so they are jawboning ahead of it. Any country can build its gold and silver reserves in the open market, and the big central bankers find it difficult to manipulate their supplies to their own advantage, despite years of desperate efforts to substitute paper for metal.

Bad enough that the basket may include currencies of non-G7 countries. As you will recall, the G7 was formed when Canada joined the Group of Six: US, Great Britain, France, Germany, Japan, and Italy. The power balances of the post World War II era are changing, and the shifts in trade and financial power reflect this.

In the interim, there will be regional currency arrangements and trading blocs as in the past. The strength and suitability of the new SDR regime will help to determine the disposition of these regional arrangements.

'Free trade' without a floating monetary exchange system is not possible. Otherwise there will be artificial subsidies and penalties among nations, as in all systems of price control. These lead inevitably to imbalances, bubbles, and crises.

The adjustments that are overdue for the dollar and renminbi in particular will make political progress difficult. But the greatest impediment to progress will be the Anglo-American banking cartel, which seeks to control the issue of money as a means of implementing policy and distributing wealth, especially with regard to the natural resources and labor of the developing nations.

Emirates Business Dubai
Do We Need a New Reserve Currency?
By Martin Wolf
Sunday, December 27, 2009

A new global currency should replace the US dollar as the international reserve currency, as the long-term deterioration of America's economy and the greenback is fuelling a "currency-regime crisis," says Martin Wolf, associate editor and chief economics commentator of the Financial Times.

Wolf, who has honorary doctorates from three universities, bases his argument in part on the Triffin dilemma, an economic paradox named after economist Robert Triffin. The paradox shows that the US dollar's role as a global reserve currency leads to a conflict between US national monetary policy and global monetary policy. It also points to fundamental imbalances in the balance of payments, particularly in the US current account.

Speaking at an event organised by the Singapore Institute of International Affairs, Wolf said Triffin believed that the host nation of a global reserve currency will inevitably run up a huge current account deficit that would consequently undermine the credibility of its currency and adversely impact the global economy. "You can't have an open globalised economy that relies for its ultimate liquidity on the currency of one country. That was his [Triffin's] argument. And, therefore, he said the Bretton Woods system would break, which it did. And exactly the same thing happened with Bretton Woods II, which is the system of pegging.

"So I agree with this. And I'm absolutely convinced now, in a way that I was not three or four years ago, that we cannot continue with a genuinely global economy which relies on national money, and that's not sold by just adding another couple (of currencies). It actually means having a global money."

Indeed, Wolf said he's in complete agreement with China Central Bank Governor Zhou Xiaochuan, who has argued for a new global currency "most credibly and convincingly."

"On the dollar, there is nothing to support this currency except the Chinese government and a few other governments that are prepared to buy it," said Wolf. "Anybody can look at the arithmetic of the fiscal deficit, the monetary policy, the external balance, which has improved but largely because of the recession -- the dollar is not adequately supported."

The US currently has a national debt in excess of $12 trillion or almost $40,000 per citizen, with a debt to GDP ratio of more than 85 per cent. In the July-September quarter, the US current account deficit rose sharply by 10.3 per cent from the previous quarter to $108 billion. In the past year, the US dollar index, which measures the performance of the greenback against a basket of currencies, has also fallen significantly.

Apart from the economic risks posed by the decline of the US dollar, China's devaluation of its currency is causing "a real problem" for Europe. The "very perverse currency adjustment" is highly destabilising for the euro zone economy and could create a crisis, said Wolf.

"There is nothing to prevent this, unless the Europeans decide they are going to intervene in the foreign currency market to buy dollars, and that would be over (European Central Bank president) Jean-Claude Trichet's dead body."

As there is "no chance" of European governments intervening in the foreign exchange markets to improve the competitiveness of the euro, it will result in major currencies such as the euro and Japan's yen becoming "very vulnerable."

"This is simply the American way of shifting the recession from them to their trading partners," said Wolf.

"What we need are global currency adjustments and it has to include the renminbi and global macro adjustments in those countries which make this less painful."

"In terms of the impact of this on the role of the US dollar as the currency of denomination for international transactions, basically I think it's become very unreasonable."

"Because the dollar, to my mind, given its underlying conditions, is no longer a credible long-term store of value," said Wolf. The decline of the US dollar underscores a phase of global power transition, with the balance of power moving from the US to Europe, China, and India, Wolf argues, adding that the greenback's loss of credibility as the dominant global reserve currency is part of this messy transition.

The Americans no longer have the means to save themselves, this is what I think people don't understand. There is no credible American policy," said Wolf. (The American policy has been to maintain the status quo and to confiscate wealth by exporting fraud in amounts that are beyond all reason. This is hardly acceptable to the rest of the world. It is remarkable how few US economists understand this for what it is. Are they so abysmally ignorant by choice or by training? Sometimes it is hard to tell. What can one expect from a group that could not acknowledge the enormous bubbles that have rocked their economy in the past ten years until the damage was done. They are as reprehensible as the doctors who helped to promulgate the psychiatric abuses in the gulag of the former Soviet Union. - Jesse)

"We need to discuss this globally in a harmonious way. It's not happening, so at the moment the euro zone is a prime victim and it will continue to be, and that will create very big problems for European-based manufacturers, and quite particularly those that are relatively vulnerable to global price effects.

"And it's a tremendous mess, a horrifying mess, and that's where we are. I'm sorry. And we've got to get through this transition as quickly as possible to a more stable global monetary system with a lesser reliance on the dollar. We're going to get there over the next 10 years; I'm sure of it. We're going to get there. The only question we have to decide is how we're going to get there."

Meanwhile, a trade skirmish between the US and China could ensue, if Beijing continues to devalue its currency to bolster export-driven economic growth at the expense of economic recovery in the US, said Wolf. (Not just the US, the rest of the world as well - Jesse)

He says China is working hard to defend the artificially low value of the renminbi in the hope that exports will pick up when external demand recovers. According to China's customs authorities, exports from January to November plunged by 18.8 per cent to $1.07 trillion from a year ago. However, according to the Royal Bank of Canada, export growth should pick up in the coming months and reach double-digits in early 2010.

China's efforts, Wolf said, will spark a "very vigorous, even vicious" reaction from the US as it's destabilising US efforts to engender an economic recovery.

Monetization: Treasury Adds $400 Billion in Bailouts for Fannie and Freddie

What's another $400 Billion in monetization so that Fannie and Freddie can keep buying up mortgage debt?

Timmy and Ben can resolve to distribute dollars even as they approach a virtual insolvency because they can create them, seemingly out of nothing. The payment obligation for their dollar debt is their own creation -- dollars. But they cannot hand out endless amounts of nature's wealth, things like oil, gold, grains, and silver except as they may possess them by industry, force, or fraud.

And that is what frustrates the statists and monetarists, why the western central bankers hate and fear the precious metals as monetary equivalents and alternative stores of wealth, and deploy their worldly power in proximity to sources of energy. Natural wealth defies their control, is a mirror to their excesses, and a stumbling block for the financial engineering that is the basis of their fractional reserve central banking and a desire for world government and ever-increasing power. Ponzi schemes must inherently continue to expand.

They say fiat, let it be done, according to our will. But natural wealth does not always respond as they wish, and its silence is a profound repudiation.

The full extent of their power to command and control the liquidity flow of the world will be tested in 2010.

".....Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck."

Demand For US Fixed Income Has To Increase Elevenfold... Or Else - ZeroHedge

And this, meine Damen und Herren. Mesdames et Messieurs, may result in higher interest rates and a taxing drag on the productive economy. Which economies specifically and to what extent depends on how well the Fed and the Treasury can shift the pain of their excesses to the rest of the world. But it is not what one might call deflationary, and an impulse for the US dollar as a stable store of wealth, unless by force or fraud.

AP
Treasury removes cap for Fannie and Freddie aid
By J.W. Elphinstone, AP Real Estate Writer
December 25, 2009

NEW YORK – The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac. ("Its" ATM card? Don't you mean the holders of US dollars? - Jesse)

The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years.

Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter.

By making the change before year-end, Treasury sidestepped the need for an OK from a bailout-weary Congress.

While most analysts say the companies are unlikely to use the full $400 billion, Treasury officials said they decided to lift the caps to eliminate any uncertainty among investors about the government's commitments. But the timing of the announcement on a traditionally slow news day raised eyebrows.

"The companies are nowhere close to using the $400 billion they had before, so why do this now?" said Bert Ely, a banking consultant in Alexandria, Va. "It's possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets."

Fannie Mae and Freddie Mac provide vital liquidity to the mortgage industry by purchasing home loans from lenders and selling them to investors. Together, they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages. Without government aid, the firms would have gone broke, leaving millions of people unable to get a mortgage.

The biggest headwind facing the housing recovery has been the rise in foreclosures as unemployment remains high. The two companies, facing mounting losses from mortgage defaults, were taken over by the government in September 2008 under the authority of a law Congress passed in the summer of 2008.

So far the government has provided $60 billion to Fannie Mae and $51 billion to Freddie Mac. The assistance is being provided in exchange for preferred stock paying a 10 percent dividend. The Bush administration first pledged up to $100 billion in support for each company, an amount that was doubled to $200 billion for each by the Obama administration in February.

Treasury officials will provide an updated estimate for Fannie and Freddie losses in February when President Barack Obama sends his 2011 budget to Congress. Though the administration has yet to disclose its long-term plans for the two companies, they are unlikely to return to their former power and influence.

The news followed an announcement Thursday that the CEOs of Fannie and Freddie could get paid as much as $6 million for 2009, despite the companies' dismal performances this year.

Fannie's CEO, Michael Williams, and Freddie CEO Charles "Ed" Haldeman Jr. each will receive $900,000 in salary, $3.1 million in deferred payments next year and another $2 million if they meet certain performance goals, according to filings with the Securities and Exchange Commission.

The pay packages were approved by the Treasury Department and the Federal Housing Finance Agency, which regulates Fannie and Freddie....

Reading for the Market Holiday - plus ça change, plus c'est la même chose

"At length corruption, like a general flood,
Did deluge all, and avarice creeping on,
Spread, like a low-born mist, and hid the sun.
Statesmen and patriots plied alike the stocks,
Peeress and butler shared alike the box;
And judges jobbed, and bishops bit the town,
And mighty dukes packed cards for half-a-crown:
Britain was sunk in lucre's sordid charms."

—Pope

THE SOUTH-SEA COMPANY was originated by the celebrated Harley, Earl of Oxford, in the year 1711, with the view of restoring public credit, which had suffered by the dismissal of the Whig ministry, and of providing for the discharge of the army and navy debentures, and other parts of the floating debt, amounting to nearly ten millions sterling. A company of merchants, at that time without a name, took this debt upon themselves, and the government agreed to secure them, for a certain period, the interest of six per cent. To provide for this interest, amounting to 600,000l. per annum, the duties upon wines, vinegar, India goods, wrought silks, tobacco, whale-fins, and some other articles, were rendered permanent. The monopoly of the trade to the South Seas was granted, and the company, being incorporated by Act of Parliament, assumed the title by which it has ever since been known. The minister took great credit to himself for his share in this transaction, and the scheme was always called by his flatterers "the Earl of Oxford's masterpiece...."

The South Sea Bubble, Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, Chapter 2

The Financial Times Man of the Year - Lloyd Blankfein

How fitting, to mark the high tide of the will to power of the Anglo-American banking cartel. No better symbol of hubris, of the overreach driven by obdurate insensitivity and sociopathic greed, of the cult of ego and the darker impulses of the human heart, that creates nothing.

Honoring the man as the epitome of 2009, a man whose bank helped to precipitate one of the greatest financial crises, if not crimes, of the century, and used it as a means of profit for their own ends. No matter what damage was caused in the process, what corruption was required to undermine the nation's well-being, thereby sowing the seeds of their own eventual destruction.

And no better day for it, than on the eve of the commemoration of the renewal of life, of genuine value, of the perennial yearning of the human spirit from within the images and the shadows, a turning away from the stench of corruption and decay, and into the light.

"For what shall it profit a man, if he gains the whole world, but loses himself?

Not even the whole world, but bragging rights, a false bravado, and a bonus.

The man of the year indeed. King of the ash heap, almost universally held in contempt. And in the end, alone. Not even rising to the level of high tragedy, but merely furtive, grasping, manipulative, pathetic. A monument to banality, and the hollowness of Western materialism.


NY Times
Financial Times Names Blankfein Person of the Year
December 24, 2009, 2:37

The Financial Times has chosen Lloyd C. Blankfein as its person of the year. The Goldman Sachs chief has become the public face of Wall Street during its most testing period since the 1930s, the newspaper said, and Mr. Blankfein’s position and his personality were the basis of his selection.

Goldman Sachs, said the newspaper, “navigated the 2008 global financial crisis better than others,” and is about to make record profits while paying up to $23 billion in bonuses to its 31,700 staff.

The newspaper called Mr. Blankfein “a tough, bright, funny financier who reoriented Goldman. Under his leadership, trading and risk-taking have pushed to the fore, reducing the influence of its investment banking advisers.”

Facing public anger in 2009 — as taxpayers raged at having to bail out the big Wall Street banks — Goldman’s profitability, and suspicions that its ties to governments around the world give it unfair advantages, made it a symbol of greed and excess.

But Mr. Blankfein has rebutted the criticism effectively, the newspaper wrote, “shifting from insisting that it would probably have survived the crisis without help from the U.S. Treasury, to apologizing for its conduct,” and finally, the newspaper noted, in an interview with the Sunday Times of London, asserting that Goldman was “doing God’s work”.

Who Is Buying All These US Treasuries (And Can They Keep It Up in 2010)?

Earlier this evening I was reading the latest issue of TheContraryInvestor "Quite The Personal Bond," and was puzzled by his account of the Treasury market.

As shown in this chart, the foreign sector has begun to reduce their exposure to US sovereign debt, just as they were sellers of Agency debt in 2008.



So who is buying Treasuries according to the latest government data?

"US households purchased $529 billion of US Treasuries in the first nine months of 2009, accounting for 45% of total new Treasury issuance. And you have been wondering just how Treasury yields have stayed so low for so long? Wonder no more. US households have done the heavy lifting unlike any other buyer this year. And as we have stated in the past, this decision by households has been driven by two very strong human emotions- fear and greed. Fear of losing money in what is a once in a generation credit bust environment. And greed from the standpoint that the Fed has made money funds completely unpalatable in terms of nominal yield prospects. Of course Treasury yields are not much higher by any means."

So far this year the Fed has purchased $293.3 Billion of Treasury Debt, and is by far the largest purchaser of Agency Debt at $803.8 Billion.

Foreign entities bought $373.3 billion of Treasury debt, and were net sellers again of $110.3 billion of Agency debt and $73.1 of US corporate debt.

"US households purchased $529 billion of US Treasuries in the first nine months of 2009, accounting for 45% of total new Treasury issuance. And you have been wondering just how Treasury yields have stayed so low for so long? Wonder no more. US households have done the heavy lifting unlike any other buyer this year. And as we have stated in the past, this decision by households has been driven by two very strong human emotions- fear and greed. Fear of losing money in what is a once in a generation credit bust environment. And greed from the standpoint that the Fed has made money funds completely unpalatable in terms of nominal yield prospects. Of course Treasury yields are not much higher by any means."

So, according to the government, US households are absolutely piling into US sovereign and corporate debt at record levels, and at record low interest rates.

And almost no one but the Fed is buying Agency Debt.

Bill Gross of Pimco has the largest mutual fund ever, compliments of the bond stampede. The prior record was in 2007 with a growth fund that was decimated by the market crash of that year. And this is why I think we might see quite a bloodbath in the bonds in 2010, as mom and pop get skinned by the Street for weighing in so heavily on this one sided trade in US sovereign debt. The US household sector is a slow moving convoy, presenting a traditional and tempting target for the Wall Street wolf packs.

Here is another viewpoint on essentially the same data that I was just reading this evening at Trader's Narrative titled, Is It All Just a Ponzi Scheme? His take on this is a little less sanguine than the ContraryInvestor.

"At first it seems that the common US household is stepping up and lending Uncle Sam the almost $2 billion. We’ve discussed at length the stampede of retail investors into bond funds this year. But as Sprott [Asset Management] details below, according to the Fed’s own disclosures, this is not what is happening. No wonder then that the US dollar has cratered and gold is the best performing asset this decade..."

Sprott Asset Management says:

"Our concern now is that this is all starting to resemble one giant Ponzi scheme. We all know that the Fed has been active in the market for T-bills. As you can see from Table A, under the auspices of Quantitative Easing, they bought almost 50% of the new Treasury issues in Q2 and almost 30% in Q3. It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it’s that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number Treasuries in this environment without the slightest hiccup in the market."

So what does all this mean?

The bottom line is that the data seems to indicate that the foreign sector traditional buyers (at least for the past 20 years or so) of US sovereign debt are walking away from the market as they had said they would do, and are moving their reserves into other instruments.

This may not be such a great problem if the US trade balance continues to narrow, but it certainly is not healthy to see the Fed and the US household sector as the major markets for US sovereign debt.

If 2010 is not a year of recovery for the average American, the ability of the Treasury and Fannie/Freddie to keep expanding their debt offerings is going to become quickly constrained. How can Joe Sixpack keep saving and buying Treasuries, and at the same time consume at a rate sufficient to grow GDP? All on a stagnant median wage and a contracting housing market? Think the rest of the world is suddenly going to grow a taste for US exports? Will the US retreat into isolationism and trade barriers? That might not be Price Index friendly.

The US is marshaling its ratings agencies and multinationals to cast doubt on the European union, their currency, and their solvency, and threaten to take them down first to maintain an equilibrium of failures.

But in fact, the US is much closer to the point of a serious debt crisis than one might imagine from what is being put out by most US based financial analysts. There is a nasty convergence of constraints bearing down on the Fed and the Treasury that look to push the ability to market dollar debt to the breaking point. If a couple big States go under next year, the dominoes may start falling very quickly.

I see the problem, but I have to confess that I do not yet see how the Bernanke Fed intends to dodge this collision. And I know that they must see this as well, and have a game plan. Could counting on an exogenous event that would provoke an artificial demand and neo-isolationism (something like a regional war, or at least a trade war) be called a plan? Can they possibly be in denial, and just looting the capital before the Empire falls? It is hard to see how the resolution of this will unfold just yet, but I am pretty sure that many of the simple scenarios that people are laying out so nicely with such fine rhetoric are more fantasy than probable outcomes. This is going to knock our socks off default-wise.

If you think that this crisis will be deflationary, then you might be a bit surprised to see what happens if and when a US sovereign debt offering fails in the market. It will not be pretty. And it will not be dollar friendly in the longer term. But who can say what will happen, when there are so many possibilities.

The market may likely reveal to us what is coming, if we are observant, and lucky, and have the willingness to listen to what we may not wish to hear.

There are some definite gaps and assumptions in the case that Sprott makes, raising more questions than providing answers. It is possible that Americans have shifted an enormous amount of capital out of consumption and stocks into Treasuries. It is also possible that this is just masking something else, as Sprott suggests. But this does not affect the argument we make, that something has got to give, as the US consumer is tapped, and cannot sustain this type of sovereign debt purchasing given the offerings that the Treasury must make in 2010. And if it is something else, then that will be revealed 'when the tide goes out' next year. The Fed and its enablers are the buyers of last resort, increasingly so. And that means increasing monetization, and a stretching of the value basis of the bonds and the dollars.

Read the full analysis from Sprott Asset Management here.

Tech Leadership in US Equities Looks Extended

We have not seen much profit taking yet into year end despite a spectacular rally from the market bottom.

Wait for it. This may be a nascent asset bubble being created to offset the coming writedowns in Commercial Real Estate and the bad debt remaining on the books of the banks.