Saturday, November 28, 2009

CAUTION: Black Swans Approaching

The first of many Black Swans took flight this week in the shape of the simmering Dubai Debt Crisis. It appears that it's not enough to build fancy high rises, shopping malls, and man-made islands, there's this "sustainable economy" thing that is also important to the overall prosperity equation.

Although as I wrote here I am not a big believer in "Black Swan Theory", it seems that Wall Street has a way of constantly being caught off guard by these pesky critters. The problem is that most on Wall Street suffer from a distinct form of myopia, that I will hereby label "Bonus Relevancy Syndrome" characterized by an incapacity to absorb or even care about any information not deemed relevant to the current year's bonus. Therefore, with only a handful of weeks left in the year, for many hedge funds, their attention deficit disorder has now shrunk to a mere ~22 trading days.

This set-up bears out several observations:

1) The average hedge fund manager is as strung out and giddy as a crack addict coming off of a 9 month binge. Fund managers overall were not well paid last year (by their standards) and many funds are just getting back to their high water marks. The high water mark is the crucial level that must be exceeded in order to allow bonus payouts. Considering we have just had one of the best 9 month rallies in the history of the stock market, suffice to say, the "boyz" are praying with all might that the market stays up between now and 12/31.

2) Yet not withstanding these at-risk bonuses, the technical indicators are all (continuing to) line up on the side of bullish complacency: Vix at a year-low 20 on Wednesday (90 last fall), ISE call/put ratio above 175 twice last week, Investors Intelligence Sentiment Index showing only 17% bearish sentiment (lowest level in several 5 1/2 years) i.e. the dry tinder is set, all we need now is the match...

3) The Dubai Debt Crisis is only one of MANY looming Black Swans (I know, by definition, Black Swans are not supposed to flock...) getting set to take flight directly in front of the metaphorical Wall Street 787 DreamLiner which is straining fiercely toward its golden 12/31 destination. Beyond Dubai, there are many other sovereign and corporate financial participants on the brink of default (Latvia, Hungary, Bulgaria, Ukraine, Spain, Greece, Ireland, UK, Japan, etc. etc. etc....)

4) Wall Street's current short-term bonus fixation combined with multiple looming INTER-LINKED geofinancial crises could create a potentially highly volatile shit storm at a most untimely juncture. For while the dollar carved out a new marginal low against the Euro on Wednesday, the dollar then proceeded to SCREAM higher vs. the Euro on Thursday when news of the Dubai crisis hit. Stay tuned for future events, because the markets will not withstand an abrupt unwinding of the dollar carry trade and the resulting flight from risk that would ensue...

How did gold perform as a promised safe haven you ask? Well, gold promptly tanked $50 on Thursday on news of the Dubai crisis (recovering somewhat on Friday). I will say it again: at this juncture, gold is not a safe haven, it is a greed haven that will get violently unwound along with the rest of the anti-dollar trade.

What say you? Would a December panic collapse off of a 666 March low in the S&P be a hellatiously sinister event, or just a burnt offering to the God of Financial Justice (assuming such a God even exists...)

Friday, November 6, 2009

The Ascent of Money (aka. Deflation)

I was wandering through Borders (book store) tonight and stumbled upon a pile of "The Ascent of Money", Niall Ferguson's latest book, marked 50% off. Having months ago purchased and read the book, I couldn't help but feel ripped off, yet the irony of the title, juxtaposed with the discounted price, could not be overstated. I guess today money really was ascending...

Coincidentally, Niall was going toe to toe with Charlie Rose the other night on the topic of America's perilous economic situation. It was an interesting interview, chock full of facts and data. The general theme was a common one these days - the U.S. economy is toasty toast and Asia is about to pick-up the baton and run with it - dollar repudiation is imminent.

And then there is Peter Schiff who is looking to run for a Senate position by capitalising on his glorified anti-dollar stance. Never mind that he has been betting that way for years and last year he cost his followers dearly by having them betting on foreign stock markets and (by extension) against the dollar. Both of which assets moved massively against his asinine positions i.e. foreign stock markets fell more than the U.S. AND the dollar rallied. Jim Rogers is basically betting the same way and for all the same reasons...$$$ Or should I say ¥¥¥.

So, how can it be that all these "smart" people still cling to this fear of imminent dollar collapse and inflation? The answer is obvious: GREED. Quite frankly, no one has figured out how to make money from deflation, so no one wants to believe in it much less bet on it, because betting on it means having your money parked in short-term treasury bills that yield zero %. Alternatively, the inflation trade is yummy - buy gold and/or short the dollar and hold on to collect your massive pay check. So, this entire reflation trade/charade has nothing to do with reality, it's all about yet another fantasy, destined to end badly...All these greed-addled inflationistas are looking around for the "next big bubble" - where will it be? how can we trade it? Believing of course that they will be the lucky few to get off the bullet train before it crashes.

Moreover, if it seems like deja vu, that's because it is - this currently popular "reflation" trade of being long commodities/gold and short dollar was all the rage two years ago - and we saw how that turned out. Now these same "savants" have put the same trade right back on, amazingly despite the fact that the economic fundamentals are far weaker now (unemployment, spare capacity etc, GDP) than they were two years ago. It just goes to show you that facts and data cannot compete with greed and wishful thinking.

In the case of Ferguson, I don't know for sure, what guides his belief in the unfounded, perhaps his motivation is not greed after all. He is clearly recycling the "decoupling" theory that the U.S. economy can continue to collapse but that emerging markets can continue to grow, not withstanding their largest customer going bankrupt. Nevermind that this was the exact same theory marketed in the years prior to the 2008 crash and that turned out to be complete bullshit. As we know, the Shanghai stock market led the entire world down, losing over 70% of value and emerging markets in general suffered larger percentage losses than the U.S. Therefore, this *new* decoupling that Ferguson talks about must have just taken place recently...say in the past couple of months. Yeah, that's the ticket...If he honestly believes that then despite all of his fancy degrees, apparently he still can't find his ass with both hands.

And ironically, as reality would have it, it looks like the lowly U.S. dollar took a stand this week (amid abysmal employment data), and appears to have put in a multi-month if not multi-year low. The ONLY asset that has yet to have confirmed the top now in RISKY ASSETS is gold, as stocks, oil, commodities all look to have put in their tops days and weeks ago. I expect gold will follow any day now...

You be the judge (click to enlarge). Is this a dollar reversal?
- break out above 6 month downtrend
- massive volume on breakout (lower right)...

So unbeknownst to the "best and brightest", here we stand atop the largest bubble in human history - the 40- year Monetary policy credit bubble. A house of cards built upon a small of base of paper currency, piled to the sky with multiples of borrowing, generating that ephemeral kind of money called "credit". Ephemeral, because this system, known as fractional reserve lending has a mountain of credit secured by a fractional base of physical cash. It is secured ONLY by our confidence in the system and collective belief that all debts will be paid and all checks will clear. Until, comes that inevitable day, when confidence is breeched and everyone reaches for physical cash at the same time - which precipitates the moment of recognition that there are not enough real dollars for everyone.

So, you ask, what could cause just such a point of "recognition"? It just so happens that according to the Elliot Waves, we appear poised for a once in a millenia event - a 3rd wave DOWN in the U.S. stock markets at ALL degrees of trend (century, yearly, monthly, weekly, daily, hourly, minute)...