SP 500 and NDX Futures Daily Charts

There was quite a push to get the SP futures to finish flat to green, with another significance divergence as big tech lagged.

Earnings guidance is trending negative, with tech the worst and banks the best.

This is indicative of the policy error of the Fed and the Treasury which addresses the big banks and the management of perceptions in certain key market pricing, while neglecting the growth of the real economy.

This is how the financial engineers create zombie economies. 

Net Asset Value Premiums Of Certain Precious Metal Trusts and Funds

I compare the Net Asset Value Premium table of today to that of Monday, with a snapshot of them taken at a time when the spot prices of both gold and silver are almost identical.

I just thought the thinness of the premiums was interesting.

There is a lot of discouragement in the metals out there.

Wednesday 6 February

Monday 4 February

Is All Stimulus Equally Effective?

I think we can understand the principle of government spending as a spur to aggregate demand, which can be useful in certain circumstances where the economy has been caught in a 'feedback loop' of stagnancy.

I won't go into it in detail now, but if the government buys things in the real economy, or provides money for other people to buy things in the real economy, the demand for real goods increases.  Simple enough. One can argue about aftereffects, but the demand increase remains the same. And the principle is that this temporary stimulus will help the real economy break out of a crisis induced feedback loop of stagnation. And I would add a serious caveat, IF other changes have been made to those problems and policies which have caused the crisis in the first place.

This is called 'stimulus' in economics.

There are other instances of stimulus being applied to an otherwise healthy but sub-optimal economy, and again, I will leave that to some other discussion. But there is the obvious caution about using artificial stimulants inappropriately to hide deficiencies in healthy organic growth, especially when caused by policy errors.

Here I speak only about stimulus in the aftermath of a crisis, an economy which is marked by endemically slack demand and investment. And I do think the principle of liquidity trap has been mistaken to the extent that the symptoms are treated rather than causes. I call this cargo cult economics. And Geithner and Bernanke are its high priests of a plummeting velocity of money supply.

But even in the case of post crisis slump, I wonder about this principle of stimulus in application. If the government wishes to add $1 Trillion in stimulus to a slack economy, would it be the same thing to just give $1 Billion each to the top 1000 richest people in the nation, or $10,000 each to 100 million randomly selected people, to be paid out over the period of a year.

I am sure that in the long run, there are equations and rationales that 'prove' that the effect of both actions are the same.  And I would imagine that some of the neo-liberal economists will likely argue that the one percent will put the funds to work as productive investments, and the hoi polloi will merely waste their money on drugs, alcohol, and video games.  This probably says less about reality and more about the inherently skewed perspective of the elite who consider the 47% to be sub-human. But there is merit in thinking that simple one time payments with no work attached are not as effective as something more substantial. 

What is the government gave 10 million people a job that paid them a living wage which, together will spending on capital assets, allowed them to repair bridges, improve parks, enhance the electrical system, build up safeguards against flooding and storms,  clean up the streets, and remove and replace dangerously dilapidated buildings.

But I think common sense and a bit of more granular thinking will show that in terms of stimulus to the real economy, if measured in a reasonably confined time horizon (ie. less than five years) one can see how the broader distribution of stimulus directly to those most inclined to spend it on real goods, rather than the accumulation of more productive assets in the face of slack aggregate demand, would have a demonstrably more effective result on stimulating demand in the real economy.

In a period of slack aggregate demand, wealth tends to accumulate. The wealthy buy more resources, and assets 'on the cheap,' and economic power and resources tend to concentrate, further dampening aggregate demand as measured not nominally but against a basket of real goods.

And this was the genius of Franklin Roosevelt, not an economist, but a practical, problem-solving leader. He reformed the banks, rather than stuffing them full of money, and hoping they would make more loans. And through a series of programs he sought to apply stimulus directly to where it was needed, in the relief of privation of course, but also in jobs which performed necessary functions and also built up the infrastructure of the nation.

Granted, there was trial and error in his method.  And he made some errors in judgement for certain, including some of his actions regarding the gold standard and the method of refunding the banks.  But we should note that he did this all under a duress that was more real and compelling and visceral than the singular crisis that caused the Congress to pass TARP.

And providing funds directly to the people without passing them through the hands of the one percent angered the elite of his day to the point of considering an actual coup d'etat, in addition to every form of political obstructionism one can imagine. And he did fail to stay the course, and allowed the money supply to contract prematurely after he thought the worst was over.  And the oligarchs still hate him, and seek to distort his record and his legacy.

 But all in all, he was a real leader at a time when most of the developed world was turning to the malady of fascism, militarism, and destruction.  He took the somewhat effete theories of Keynes, and put real substance into those principles, while engaging in sweepingly effective reforms that served his country for over sixty years, until a new generation forgot the lessons of the past.

And compared to the faceless bureaucrats and economists at the Federal Reserve and the Treasury, and their own series of failed financial asset bubbles, he was a natural genius.

Gold Daily and Silver Weekly Charts - A 'Risk On' Day

Gold was pushed back hard from its attempt to break out above its 50 DMA which is around 1684.

Silver held its ground a little better.

Cap, cap, cap.

C'est la guerre monétaire.

I found this comment from a reader on the equity markets to be resonant with my own thoughts.

"High frequency trading software that focuses on feedback loops is a useful diversion to hide front-running, short squeezing, and other parasitic activities. The current BS about rotation out of bonds is merely an attempt to attract retail because they’ve run out of shorts to squeeze to take the markets higher.

If you can put aside your moral outrage, this strategy is a thing of beauty – disgusting, evil, and fraudulent but beautiful in its execution."

Frauds R' Us.   Its the major growth industry, and the dominant export of the US and UK.

SP 500 and NDX Futures Daily Charts - The Dell Computer Market

It was rally mode today as traders celebrated the great economy in Europe, which is allowing their banks to pay back the ECB as they get 'healthy.'

Huh? Well, that's what the spokesmodels said. Its a 'better-than-expected' world, at least for the one percent.

This is the Dell Market, with lots of money flowing around the plate, but little value being added, just a further concentration of money and power.

Is that Mr. Megaphone Talking on the SP 500 Futures Chart? Or Yet Another Headfake?

Is that a megaphone top forming up on the SP 500 March futures chart?  Or is the Fed just glad to keep fueling this glorious rally for freedom?

Formations like this are fun to watch as potential indicators, but they really do not work until they 'work.'

That is, they are not active until activated by a clean trend break in one direction or the other.  This is true of all chart formations that represent a possibility that can become more or less probable over time, depending on which way things develop.

Charts don't do anything.  They merely reflect the underlying reality in an easier to grasp representation, for those with that sort of visual inclination.  They are a roadmap, not the road.

Right now 'the market wants to go up,' meaning lots of market participants want it to go up, want to take it up and keep squeezing the bears who piled on ahead of the fiscal cliff and sequestration.

My interpretation of this 'megaphone' is that the market is undecided about the viability of the rally continuing given the impasse in Washington and the impending battle of the budget over sequestration which should happen in about four or five weeks.  And despite the recent happy talk, the European situation remains volatile, and the currency war continues.

If you want to play a formation like this, thenwait for it, and give up bragging rights and save yourself a loss from being 'too early' or just plain wrong.

There is a word for those who bet against the market on the if-come.  They are called 'broke,' and spend most of their time badgering people on chat boards.  They are often wrong, but rarely in doubt.

Why Bears Should Tread Carefully

Enter the Credibility Trap: A Prediction About the S&P Ratings Lawsuit

No, I do not predict that there will be no criminal indictments and convictions to follow the suit, or even serious personal penalties from the civil action beyond something that is tax deductible as a cost of doing business. That is like predicting that a heavy rain will make puddles.

I predict that the primary defense that will be offered by S&P will be based on 'the credibility trap' itself.

The usual defense in cases like this is the First Amendment, that S&P was merely voicing an opinion. In this particular case, after having combed through over 20 million documents, the Department of Justice will attempt to prove that S&P was not merely voicing an opinion, but lying for gain, which is not 'protected speech.'

And most of them obviously cannot use the CEO defense of non-involvement and general ignorance of the entire situation, since they were being paid to write professionally informed judgements based on a factual due diligence.  It would be like a surgeon arguing against malpractice because he was watching porn while performing surgery, and was so distracted he did not really notice what he was doing and was therefore merely a hapless bystander.  Don't laugh.  It seems to be working for MF Global, and several national governments.

Having these usual avenues thwarted, I suggest that S&P will point to all the other credible voices of the economists and politicians, 'very serious people,' who said either absolutely nothing, or voiced similarly misplaced opinions and 'mistakes in judgement' about the true nature of the unfolding financial frauds.  How can you blame us, when no one of consequence said anything differently, forcefully.

So rather than key actors in a massive control fraud, they will portray themselves as hapless victims of the same mass delusion that affected most of the New York-London-Washington establishment, with many top universities in their supporting cast. 

Will Alan Greenspan offer to be an expert witness on the perils of mistakes made while blinded by a sincerely held ideological delusion?  Poor fellow, just a good chap making an honest error in judgement.  He used a bad model.  Who can blame him.

The defense will be 'the credibility trap' itself.  You cannot convict us, without indicting yourself.  

And if they are as I think they are, the S&P team will bring some credible implications of their case for the sacrosanct TBTF crowd to the plea bargaining process, and make its objective the best terms in a settlement while admitting no wrongdoing.   We chose to settle because it was cheaper.  We are victims of big government.   The usual suspects will run with that.

It is a corollary to the credibility trap that no one who knows 'where the bodies are buried' will be personally inconvenienced beyond mere appearances.

It will be interesting to see how this plays out.  It might set the tone for the 'investigations' of the coming collapse and scandal in the paper silver market.   How could we have done anything wrong when the CFTC investigated us for five years, and sat next to our people almost every day?

What Time Is the Next Crisis? - An Historic Warning From John Hussman

"The enemy of the conventional wisdom is not ideas but the march of events."

John Kenneth Galbraith

This is from John Hussman's latest weekly observations which you can read here.

In every instance he cites with which I am familiar, any concerns about the gross mispricing of risk were lightly dismissed, because 'the market says that everything is all right.'   As if the financial markets were some prescient, infallible instrument, and not overtaken by the manipulation of insiders and the monied interests. 

The 'rising market' kept most criticism of the policy errors in the growth of the credit bubble cowed and quiet, until the inevitable market break and crisis. That the financiers have not yet completely destroyed the global economy is not particularly reassuring, while they are still working at inscribing their arrogance, writ large on the pages of history, chapter by dreadful chapter.

Or more cynically one can conclude that yes, things are getting out of control, but we must keep dancing while the music is playing, and say nothing while the money is flowing in order to 'save the system,' while disabling the smoke alarms and stuffing one's pockets.

As long as the Fed can keep printing money and delivering it to the Banks and the one percent, and not to the real economy, through its purchases of their (fraudulently) mispriced financial assets, this could keep going, while maximizing the damage.  While it does give the financial engineers some feeling of control, it really does nothing constructive except to delay the essential reforms.

The combination of constructively applied stimulus and sweeping financial reform was the genius of Roosevelt, and the lack of it is the failure of Obama.

And the big correction might not even show up all that readily, in nominal terms at least, in the equity markets for some time, being papered over by a blizzard of new money.  And so that implies a crash in the bond markets, as we saw a few years after the Great Crash of 1929.  But they are getting better at the cover ups, so who can say.

The tail of financialization and leverage is still 'wagging the dog' of the real economy.   After reading the current thoughts in mainstream economics, and Modern Monetary Theory, it seems quite likely that history is about to deal out another hard lesson in real wealth and value.

I am ambivalent to the exact timing since I cannot know it.    And so if another year passes and 'nothing happens' I may not be cheered by it while the fundamentals like median wage continue to deteriorate.  This is the mechanism in which bubbles develop, and we have seen more of them than most, and with increasingly intensity.

But I am more confident that the punchline to this comedy, if it continues unabated, will be the devaluation of the currency and at least a de facto default on the debt which can take several forms. And the usual yahoos will rise up and seek power, promising an hysterical people to take away their pain, while inflicting it on 'the others.'

"Present market conditions now match 6 other instances in history: August 1929 (followed by the 85% market decline of the Great Depression), November 1972 (followed by a market plunge in excess of 50%), August 1987 (followed by a market crash in excess of 30%), March 2000 (followed by a market plunge in excess of 50%), May 2007 (followed by a market plunge in excess of 50%), and January 2011 (followed by a market decline limited to just under 20% as a result of central bank intervention). These conditions represent a syndrome of overvalued, overbought, overbullish, rising yield conditions that has emerged near the most significant market peaks – and preceded the most severe market declines – in history:

1. S&P 500 Index overvalued, with the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) greater than 18. The present multiple is actually 22.6.
2. S&P 500 Index overbought, with the index more than 7% above its 52-week smoothing, at least 50% above its 4-year low, and within 3% of its upper Bollinger bands (2 standard deviations above the 20-period moving average) at daily, weekly, and monthly resolutions. Presently, the S&P 500 is either at or slightly through each of those bands.
3. Investor sentiment overbullish (Investors Intelligence), with the 2-week average of advisory bulls greater than 52% and bearishness below 28%. The most recent weekly figures were 54.3% vs. 22.3%. The sentiment figures we use for 1929 are imputed using the extent and volatility of prior market movements, which explains a significant amount of variation in investor sentiment over time.
4. Yields rising, with the 10-year Treasury yield higher than 6 months earlier.

The blue bars in the chart below identify historical points since 1970 corresponding to these conditions.