Risk? What Risk? We Don't See No Stinkin' Risk..

"It is the absolute right of the state to supervise the formation of public opinion." Paul Joseph Goebbels

As measured by the VIX, the volatility index, the perception of risk in US markets has declined significantly in the last twelve months from over 50 to current readings around 20.



As a response to this changed perception, mutual funds are once again fully invested, with levels of cash reserves at record lows. In other words, the 'other people's money' crowd are all in.



There is an interesting distribution top forming in the US equity markets. This rally has been driven by liquidity delivered from the Fed and the Treasury primarily to the Wall Street banks, who are deriving an extraordinary amount of their income from trading for their own books, at least based on published results.

Much of the rally in US stocks has occurred on thin volumes and in the overnight trading sessions. Definitely not a vote of confidence, and a sign of potential price manipulation in fact.

Is this a 'set up' to separate the public from even more of their own money, using their own money? Perhaps.

The government is frantic to restore confidence in the US markets, and the toxic asset rich banks are more than capable of using that sincere interest to unload their mispriced paper on the greater fools again.

The perception of risk is a powerful tool in shaping the response of markets, and as an instrument of foreign and domestic government policy actions. It is nothing new, as indicated by the quote from Joseph Goebbels, but it is rising to new levels of sophistication and acceptance in nations with at least a nominal commitment to freedom of choice and transparency of governance.

"There is a social theory called reflexivity which refers to the circular relationship between cause and effect. A reflexive relationship is bidirectional where both the cause and the effect affect one another in a situation that renders both functions causes and effects.

The principle of reflexivity was first introduced by the sociologist William Thomas as the Thomas theorem, but more importantly it was later popularized and applied to the financial markets by George Soros. Soros restated the social theory of reflexivity eloquently and simply, as follows:

markets influence events they anticipate – George Soros

This theorem has become a basic tenant of modern central banking. The idea is that manipulation of the psychology of market participants affects the markets themselves. Therefore, if you artificially suppress the price of gold, you reduce inflationary expectations and reduce inflation itself…so the theory goes."

Why Do the World's Central Banks Manipulate the Price of Gold?

For now we must watch the key levels of resistance around 1115 in the SP. A trading range is most probable but there is a potential distribution top forming with a down side objective around 870 on the SP 500.

It does bear watching, closely, keeping in mind that this is an option expiration week, and the traders expect the market to misrepresent its price discovery, as the result of conscious manipulation.

Saving Private Greed

As best we can figure, this rally is providing cover for the big Wall Street banks who are issuing equity as fast as their little hooves can move, to qualify for the TARP payback mechanism.

By 'proving' that the market wishes their debt and equity, Timmy says they will be permitted to pay back their TARP funds, and be released from scrutiny on their bonuses.

While the volumes stay thin and the Fed's wallet remains fat, this rally make continue. Or at least an optimistic trading range.

As a side note, I made the first borscht of the summer season yesterday with very nice beets from a local source. Slowly roasted the beef and beef bones, onions, and celery to carmelize in a foil pan on a grill outside, and then cooked it up with the already cleaned and boiled beets, beef stock, seasoning, a little sugar and vinegar in a big pot for a couple hours. We then allowed it to chill overnight. It was a thin clear broth but a deep purple, and loaded with diced pieces of beef and beets, with a few very small round redskin potatoes.

With a dollop of sour cream and chopped sweet onion, DELICIOUS! and refreshing.

By far the best, and a delightful distraction from this wretched market.

US Equity Rally in Context From the Start of the Bear Market

So far the rally appears to be 9/10ths short covering and momentum speculation.

In order to proceed further and break through some formidable overhead resistance real buying by insitutions and individuals must appear and the volume adjusted cash flows must turn more positive.

In other words, so far a typically impressive bear market rally that may be getting overextended without a serious revaluation of the ecoomic outlook. Next week's Jobs Report may help in that assessment.

The insiders and hedge funds still holding equities would greatly enjoy the stock piggies (institutions, 401k's and private investors) coming back into the markets so they can continue to unload their increasingly worthless assets.



Here is the big picture. It is 'possible' that this is not a bear market which we are experiencing.

However, there is a dramatic spread between 'possible' and 'probable' that even our mighty Fed and Treasury cannot easily diminish with their printing presses.

The Character of this "New Bull Market"

The paid for opinion pundits are touting a new bull market on the Bloomberg today.

Is this a bottom? Well perhaps, but until we see some positive change in the economic indicators that are not paper exercises in thinly veiled accounting fraud we choose to remain in cash and precious metals, while trading the ins and outs on a daily basis, trying to stay out of the way of the antics of the Wall Street wisenheimers.

So far this feels like a distribution rally before a retest of the lows. It is the timing of things that is the challenge, and the ability to spot a genuine change in character in the long market trend.

This is probably not the place for any investors to enter the markets, since the risk is still so historically high, although a little lower by recent standards.

Time will tell. The Fed fooled us in 2004 with their willingness to intentionally create a housing bubble to avoid the near term consequences. Perhaps Treasury and the Fed will cast caution to the wind and do it again, setting us up for a larger, more destructive collapse on the next group's watch.

But the character of this 'bull market' strikes us as the same as that of those who are our financial and political leaders: shallow, false, short-sighted, manipulated by dark forces, self-serving, a pleasant appearance over an underlying rot, and a in sum a terrible disappointment and lapse of the discovery and disclosure of things as they are.