June 22, 2011

Short-term: 2 green, 1 yellow, 1 red
Intermediate-term: 3 yellow, 1 red
Composite: Neutral

A poor follow-through day is not good news for this bounce. And most shares had no liquidity – high bid-ask spreads, computer/automated programs drove most of what did trade.

In more significant “under the headlines” news, word is leaking out that money market funds in the US are now heavily levered to commercial paper issued by European banks. They do not have significant business in the US that generates USD. So how are they going to generate the dollars to pay off the commercial paper? Money market funds — marketed as a “safe” cash alternative — have now become a major bet on a currency squeeze and on the balance sheet quality of European banks and on a Greece bailout. With zero rewards to be delivered to fund holders – if the bet pays off. Money markets have now become part of the Wall St scam. The Federal Reserve knows this – it was mentioned by Bernanke at his press conference yesterday.

This creates a perverse problem. There is no escape from volatile markets in “cash”. At least not if that cash is in the form of money markets. Money market fund holders are now checkmated. We are now a full participant (well not a “full” participant since we will receive no rewards/bonuses – only expenses/risks) in all the financial chicanery merely by “sitting on the sidelines” with “cash” in a “safe” money market fund. If those scare quotes scare you, they should. Because when risk is transferred to those who are merely demanding that a currency serve as a unit of account; then the currency no longer really functions as money.

This really has become a completely insane financial world. Zero-yielding money market funds now require a freaking HEDGE in order to preserve the principal. Longer-term, this means only one thing — get physical gold and silver in your possession and out of the banking system. Not futures, not leveraged, not with debt, not miners, not ANY of the financial/paper crap that has built up around everything. That doesn’t mean all your “cash” devoted to that — because, like it or not, gold/silver are NOT legal money and they never will become so. They may become de facto money if/when the entire financial/legal de jure fiat money system breaks apart. But that is solely emergency fund or EOTWAWKI.

For everything else — your long-term plans re “retirement” (a quaint 20th century notion that will soon die) or other long-term saving — you are stuck in the world of financial risk with no escape (and no reward unless you actively manage that risk). And in that world, the dollar is actually massively undervalued against other currencies — most especially against the Swiss france, the commodity currencies (A$, NZ$, C$), and to a lesser extent Yen, Euro, Pound. Unfortunately also, in that world, “value” doesn’t really drive trading strategies in shorter time horizons.

As an aside. This is perhaps another example where we will be forced to emulate the “Japanese housewife”. Who recognizing that their savings would yield nothing but still risk everything, decided to embrace the risk, learn about it, and become a currency carry-trader.

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June 16, 2011

Short-term: 1 green, 1 yellow, 1 red
Intermediate-term: 4 red
Composite: Bearish

A bit of a disconnect. The short-term indicators are close to an oversold condition (and possible technical support levels too) – but intermediate term indicators are deteriorating further. Given the overall news – and especially the complete absence of liquidity in the market – it will take a headline news event to create a bounce.

Something like “IMF and ECB agree on Greece debt package. Greece agrees to pretend it will pay the debt back. Banks agree to pretend that their balance sheets are solid. Everyone agrees that now is a great buying opportunity. Everyone wins. Sunny days are forecast.”

Interestingly, I cannot find the actual price of a Greek sovereign bond. All the news items are about the cost of a Greek credit default swap (currently 2189 basis points – 21.9% of the principal value of a 5 yr bond). But CDS’s are purely leveraged side-bets made by the peanut gallery of banks and other finance insiders — who have already proven that they get to keep all CDS profits while passing on all CDS losses to taxpayers.

As long as the price of an actual Greek sovereign bond remains completely hidden behind a wall of fraudulent and opaque accounting, then the Greek people themselves are unable to decide whether the costs of sovereign default (inability for their govt to run deficits for years, dropping out of the euro, etc) outweigh the benefits (reduction of the debt principal and future tax payments). In theory, and historically, there is another cost of sovereign default to foreign creditors — and that is war – as those creditors may try to forcibly take what is owed to them. But denying that information to the Greek people themselves means that the Greek government has already allied with foreign banks against its own people and the Greek people are no longer sovereign. Their government is no longer responsible to them.

While the particulars of what is happening in Europe are unique to their disastrous euro experiment; some of the core sovereignty issue applies to the US and other governments as well. Governments are increasingly going to become allied to the global multilateral institutions themselves and any practical notion of “government is by the consent of the governed – by a social contract” will simply vanish. And I seriously don’t think it will be challenged. We are far more addicted to the globalized mess of pottage than to the freedom/responsibility of self-governance.

History Geek Time

OK. I like history and charts/numbers — and sometimes the two show something quite interesting.

Here is the — inflation-adjusted, total return (price + reinvested dividends) chart overlay for two time periods — post-1929 and post-2000

The same chart without an inflation adjustment

One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge — even to ourselves — that we’ve been so credulous. So the old bamboozles tend to persist as the new bamboozles rise. — Carl Sagan

There is no question that inflation is one of the best bamboozles. It was Keynes who observed —
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

And, surely, the entire “inflation-adjusting” process is one that can conceal/distort as much as it reveals. But even using government-created inflation data, what is revealed is the massive deterioration of our economy and the transfers (via inflation) of wealth that have occurred since the stock market bubbletop of 2000. Not 2008. 2000. Ten years. And even at this point, Keynes is probably right that only 300 people in the US actually understand what is happening to them. For the rest, merely an inchoate anger that something is badly wrong

Where Keynes is clearly either wrong or evil is that our government has been following totally Keynesian policies during that entire time. Monetary policy was for all practical purpose near-zero for most of the time. Bush and Republican Congresses spent money like drunken sailors trying to goose the economy. And Bush/Obama and Democrat congresses have spent money like drunken sailors trying to goose the economy. And we are still now in just as bad shape in real terms as we were in the Great Depression. None of it has fixed the problem. Nor has any real honest serious open public discussion of the problem even occurred yet. Just like Japan, we have already had a lost decade. We just haven’t known it.

That is the real “value” of inflation to those who benefit from it. It – combined with a bit of social welfare around the edges to dull the senses of those who should be angry as hell and a lot of divide-and-conquer to ensure that no real agenda/discussion is allowed – is more effective than opium. A population that should, IMO, be hanging the bastards from the trees by now is instead generally simply continuing to play our acceptable role in the divide-and-conquer game. Pretending that if we elect a slightly different group of bastards that the game will change in our favor. And once that no longer works, then presumably a war will be started so that we can be riled up to go out and smote some them. Divide-and-conquer on a grander scale. That is ultimately what worked in the 1929-1945 timeframe. Pearl Harbor. We did not “solve” the underlying problems then. We just floundered until a war presented the right circumstances/conditions for the problem to be coincidentally solved.

I do wish I were one of the one-in-a-million. Sometimes I think I am. And no doubt I understand economics (without being tied to supporting the existing structures that create this problem) better than the vast vast majority of people. But I know I’m not one of the one-in-a-million. This stuff stretches me to my limits – and it is beyond those limits where understanding lies.

Enough.

Retail Investors

Retail investors (minnows all) have been pulling money out of stock mutual funds ever since the “flash crash”. For good and obvious reasons – because however much the sharks mock the investment intelligence of minnows; minnows do know when the game is rigged and when they have no chance. Unfortunately, the minnows are jumping into domestic taxable bond funds right now — mainly treasuries issued by an entity (government) that the sharks obviously own — at their bubbliest prices ever — so maybe the sharks are right.

At any rate, I do agree with others who say that this pullout from equities — 28 of the last 43 months have seen equity outflows – may well be the beginnings of a generational disdain for stocks. If so, expect serious PE compression over time and ignore most equity valuation measures from the last 30 years.

And now that portfolios are shifting towards T-bonds, expect violence on the part of the “shareholder class” if government tries to hyperinflate away their bonds. I doubt American minnows will be as vigilant on this as German minnows are now. But this is still a powerful – and growing – force that will favor deflation. Only time will tell whether the forces favoring hyperinflation/default (the young mostly) become influential at all in the debate. Perhaps another stimulus program — free iPads and ecstasy/meth – in combination with horrible education – will numb that demographic into dumb.

Entrepreneurs and Government

Small businesses have become increasingly pessimistic ever since the 2008 bailout. For good reason since the purpose of that bailout was to rescue the big and the cost of that (in a world with no such thing as a free lunch) was to kill the small. Unfortunately, it is really boring to show the effects of this via statistics. So how about an anecdote — about a 7 year old girl — with a lemonade stand. A perfect minnow.

Portland lemonade stand runs into health inspectors, needs $120 license to operate

Your stimulus tax money at work — creating jobs for state bureaucrats and all sorts of other hopeychange to believe in. This now ensures that we won’t have anything that looks like the “Great Depression” in future — because government has now found a way to prevent all those hideous things like people selling apples (health violation inspections) and matchbooks (potential terrorist weaponry) on street corners.