PIIGS in Poo

"The Titanic is SINKING!" ledes John Mauldin's latest newsletter. Greek bonds shot to super-junk levels at 18%. The Euro has continued to freefall, now below $1.32.  It was above $1.50 just last Dec. Breakfast with Dave notes that the cost of the bailout for Greece has risen to €90B, and with Portugal (€40B) and Spain (€350B) next, the cost has become an astounding €480B! The IMF can only cobble together €200B.

John summarizes why the Euro-tanic is sinking:

In order to get financing, Greece must willingly put itself into a multi-year depression. And borrowing more money when it cannot afford to pay back what it has will not solve the problem. 61% of Greeks now favor leaving the euro. How has Greece responded? By banning short selling on its stock market for the next two months. That should make things better. Greeks are responding by rioting and going on strike. But you truly know when a country is dysfunctional when its AIR FORCE goes on strike. Yesterday Reuters reported that hundreds of Greek pilots called in sick in protest. The response from government? The Minister of Defense said he was "profoundly disappointed." Now that had to make the pilots feel bad.

The S&P cut Greece's bond rating to junk status (BB+), and cut Portugal two steps (from A+ to A-). Spain is the next PIIGS to step into poo. An inadvertent leak shows Spanish unemployment is now above 20%, making it that much harder for Spain to live within any sort of workout plan. The S&P cut Spain's credit rating one notch today, to AA. 

A deal with the IMF seems likely this weekend, possibly as much as €135B, but it won't do much more than kick the can down the road. What complicates the rescue is that the PIIGS are not suffering a liquidity crisis, which could be solved by a flood of central bank money, but a deep structural crisis from too much borrowing relative to income. Simply put, a solvency problem, not a liquidity one. 

 

Gold is soaring in Euros. Gold is not so much a hedge against inflation as a hedge against bad government policies. The barbarous relic is benefitting from all the problems. 

 

I posted last weekend about how it looks more like history will repeat. On May 11, 1931, the Creditanstalt bank went bankrupt, and the Austrian government rushed in to save it. The run on the bank accelerated as creditors saw a chance to get whole. A month later, reserves exhausted, the Austrian government fell, the first of a series of domino defaults across Europe. This spawned the second wave down of the Great Depression, after a period in which optimism ruled and we thought some sort of recovery was on. Sound familiar? 

The Greek deadline is May 19, when a bond issue needs to roll forward. The rescue deadline seems to be May 9, when the Germans have elections, although wouldn't it have been better to wait until after? The bailout is very unpopular in Germany. In any event, these dates bracket the Creditanstalt date. 

Already we see a run on Greek banks. The bailout this weekend, if it occurs, runs a huge risk that the run on Greece accelerates as creditors rush for the doors. Greek bondholders could lose as much as €200B in a default, well beyond the €135B of the rescue. Total Greek debt is touching €300B. First ones out may stay whole ... 

Take a look at these charts, showing how near the end the bonds go parabolic - the signature of an impending default. These charts cover Greece, Portugal and Spain.

 

Charts courtesy Greg Weldon from Mauldin's newsletter.

Comments

[Patrick]

I'll believe it when I see it. The Piigs have been in the news for so long that the chances that they might actually cause something, aside from printing more money, is getting pretty remote.

Very rarely do consensus fears actually materialize. The stuff that hurts you is usually on page 72 in a one paragraph statement about something no one knows about. By the time it makes it to the front page it is too late for your portfolio. Most of this stuff is strawmen puffed up to make it appear that the folks in charge are actually doing something. Last night it was Obama calling Merkel. Whoop De do!

[marketman]

So has Glenn Neely once again been stopped out of yet ANOTHER losing short position after his emergency recommendation on Tuesday?

[Mamma Boom Boom]

Not a lot of reason to continue talking about this subject. The time for talk was 60-90 days ago. Today, we should be watching our investments grow.

[DG]

"So has Glenn Neely once again been stopped out of yet ANOTHER losing short position after his emergency recommendation on Tuesday?"

I'm SOOOOOO sure you were "buying the dip" on Tuesday.

Man, living the life criticizing from the sidelines must really agree with you. Me, I'd get bored.

[TC]

Let's face it, Neely has been awful.
He's not even worth talking about anymore.

[Thrill]

I dunno Patrick..... the Eurozone mess has taken the attention off of US cities, counties, and states rather nicely. OUR problems ARE on pg 72 most of the time, but just like Greece, they cannot print money to get out of the muck. Meanwhile, the market soars.......

[Thrill]

Yelnick, is it hard to have as much faith in wave theory when there is so much creative accounting, fraud, financial wizardry, bail-outs (extend & pretend), and gamed gov't statistics? My take is they collectively screw the timing and extent of the waves beyond "normal" human psychology.... (whatever that is). The sheer tonnage of crap in the system is daunting.

[G2]

Me, I'd get bored

Seems to me that it's you that has become bored of championing Neely as the "special" one. Is it true that you no longer follow his recommendations?

[DG]

"Let's face it, Neely has been awful.
He's not even worth talking about anymore."

There hasn't been anything positive in the past year's results, no doubt.

If the past is any indication, though, when wave-(C) starts, his results should turn back up.

"Seems to me that it's you that has become bored of championing Neely as the "special" one. Is it true that you no longer follow his recommendations?"

The Weekly ones are worthwhile, but I would not recommend utilizing the shorter-term recommendations. I am also of the opinion that his wave count is the "right" wave count on the S&P.

I think Neely should put all of his focus on the Daily and Weekly timeframes. The Weekly is better, but there may also be opportunities to improve Daily recommendations.

I also think that the "alternatives" he's developed to NeoWave to manage trades in unpredictable markets need a re-think OR he needs to evaluate how he is implementing those strategies. I find it hard to believe that Neely River, for example, didn't once signal bullish conditions ahead at one of the multiple pivot lows during the past year. If it did, which I have to assume it did, why did Neely not recommend going long? If it didn't, then it is clearly not a technique which can accurately interpret market conditions and should be scrapped. The first situation is fixable by eliminating bias, the second isn't fixable. Neely needs to figure out which one is in play and move forward on that basis.

So, while I remain convinced that NeoWave theory is quite useful, some questions remain about the other tools Neely's developed and his ability to use them in an unbiased manner.

[Bird]

Maybe the issue is not with Neely. Or wave theory. Maybe the issue is us.

Take any theory of the markets: fundamental analysis, classical TA, EWT, Gann. Some time or other these all work, then any one could be found wanting. Even good money management can flounder, otherwise that would be the answer and investment banks would not resort to violations of conscience in order to make money. Even if you have been very successful over many years, your success can be eclipsed by events.

The point is not that it is worthless or that there aren't principles that hard work can approach. It is that reason alone is insufficient. The greatest generals of the ages, armed with superior force, have lost critical battles and ultimately wars. Something more is at play.

Reason + what? I am not even saying reason + intuition, although that is a direction. I am not saying that because I still wonder if it puts the cart before the horse. We would put intuition at the service of reason, instead of the other way around.

But to "put intuition first" seems moronic. Nothing could bring more shudder of fear to the reasoning man than that, to be lost at sea without oars.

Our reason, our ego wants to be in control. Absent an alternative, it needs to be. But it wrests control from everything else and proclaims itself King. Reason must do its job, just as lower and higher functions must. But maybe reason alone is not the best driver of the bus.

[Michael]

Entire iron ore, coal, nat-gas, drilling, and commodity sector getting crushed. Look out below!

[DG]

Bird,

I'm curious what you mean by "reason"? It seems like you are implying that the market should follow the fundamental analysis which is most satisfying to "reason". But, one of the major tenets of technical analysis is that fundamentals are not the only driver of prices, right?

To make a more concrete example, when my trade signals say "Go long" in the current market (I got a long signal at 120.11 SPY today), that is offensive to my "reason" because I am fundamentally in the deflationist camp, which means that I believe the overall trend of prices, across all assets, will be down. Yet, the data show that following those "unreasonable" trade signals is profitable.

On the flip side, when my trade signals say "Go short" and I get stopped out of a trade with a loss, I find that "unreasonable" because I find it hard to fathom that someone could find value in today's markets, with deflation the most likely outcome over the long haul. Yet, not every short trade is a losing trade, so clearly there are moments in the market where "reason", as I see it, is predominant and asset prices fall.

I use the words "trending" and "non-trending" to describe market environments precisely because all I care about is the underlying price dynamics, not how they relate to reasoning capabilities or the lack thereof. "Wave" theory is aptly named in the sense that one cannot reason with the ocean.

[yelnick]

Thrill, wave theory is simple to grasp but hard to apply, hence attracts a lot of really bad wave counts. The Internet makes it easy to scan through them, and be left clueless. As I scan them I can narrow down to the better wavists. Two observations:
- this correction is still within normal time/distance ranges for a correction
- you cannot confirm the count until after a break, hence the counts seem to move rather than stay stable

That jitter will remain until a real break. Neely promised a more stable count, and a lot of his neo-wave is around wave counts that don't jitter so much. He admits however that in the middle of a correction his precision goes away.

[marketman]

CLF = "Adult Swim Only" today.

[Account Deleted]

Respected DG !!

Can u please help with one chart if its possible for you.I cant understand the current wave structure of this chart and the possible breakout upside or downside in it.

http://yfrog.com/49jptp

Thanx in advance
Regards
VB

[john]

Looks like world wide hyperinflation is on the next page.

[marketman]

"But maybe reason alone is not the best driver of the bus." - Bird

And it certainly is not conducive to being a successful trader that "listens" well to what the market is telling him. You've got to be able to leave your Ego at the "door" . . . otherwise you will put yourself in a position of taking big losses.

:)

[Don]

As I scan them I can narrow down to the better wavists.

Is their success because of their superior wave analysis or is it due to the other tools in their toolbox? No one uses wave analysis exclusively.

[Hank Wernicki]

Steve H was right for the Flat then Kaboom !

Thursday April 29th
1:33 pm

hmmmm Heads UP

I see it for the DOW 30

On a yearly / daily chart during the middle of January is the Child Fractal

1/11 to 1/19 <<<

The Parent Fractal for the DOW iteration started on 4/15

What this means is one more nominal High for the DOW TOP

Then a 1,000 + point Decline, probably more since this is a parent

Maybe 3 X = 3,000 points would not be out of the question

[Michael]

Does anyone here actively trade individual equities?
Just curious.

[yelnick]

Don, is their success due to waves only or other tools? Interesting is that it varies. Hochberg uses lots of tools. Caldaro uses very few, just price and pattern. Neely is in between. http://www.neowave.com/qow.asp. Many of the newer wavists rely on price/pattern plus breadth/volume measures.

[Bird]

Yes marketman.

DG, there is a question of doing what is "right" even though it goes against what you feel, which may or may not be reasonable. My question is whether success at the markets depends on being in control and being smart and doing the right thing, or whether something beyond that is called for.

You have worked out an approach that in the recent past has been right over 60% of the time with winners twice as good as losers. If this is a 100% reliable result, then this would appear to be all you need. Time will tell.

But life is not linear. Sure if you throw the apple up it will normally come back down. So laws of nature are at work. But things are just not all arranged in neat, logical rows. If they were, then life would not be life, it would be a dead machine.

I am really talking about the illusion of being in control via the ordinary mind. One minute you are there doing fine and the next minute a piano is dropped on your head. Was this just a stupid accident?

We can't ordinarily do without our ego as it is usually "all there is". But I'm not sure that the ego is supposed to be the boss. History is replete with extraordinary expressions of genius that transcend the ordinary. I have had clear tastes of higher influences within myself. If I shut them out, which I frequently do, I think I am actually messing with something fundamental about the purpose of life. I am going against the true way of things and will probably be squashed like a bug. One can go for many years, maybe even all of one's years continually ignoring the basic point.

Then the piano drops from the sky and, if you the myths turn out to be true, you get to start all over again.

[vipul garg]

Hank,
1000 point decline on dow is what kind of top?
a monthly top or something

and for 3000 point decline what kind of probability are u assigning it ?

[Hank Wernicki]

Major top similar to jan 19th Monday 2010 ........

[vipul garg]

okay. lets call it a 13 day decline then.

[DG]

Bird,

For me, it's all about what Livermore says, "There is nothing new under the sun and certainly not on Wall Street" or words to that effect.

"I am really talking about the illusion of being in control via the ordinary mind."

I can show you a sequence of trades using the method I recently developed over the past year with the Kelly Formula for position-sizing that would have taken a $100 account on April 3rd 2009 to a high-water mark of $38,386,818 (good luck finding an instrument allowing the recommended leverage, though) on February 5th 2010.

At that level of potential, I don't care about being in control. Was I "in control" when I hit upon the central intuition of my methodology? Dunno. I know it took me months of thinking about the market before it "hit" me and, I will admit, it was kind of an epiphany, although, in my usual manner, it was a data-driven epiphany, as I thought about Neely's failures over the past year and beyond.

[marketman]

Before this Bull move is over I believe that high yield spreads will be trading 300 bps over, and the VIX will go to 10. That would be quite normal for the cycle.

[Wave Rust]

Hank,

I agree with the short term top coming, and it is one lesser degree than the January top.

It's likely to be the 5 of 3 of (3) of Primary 1 from the March '09 low. Then 5 of (3) into mid to late May. (4) for a month or so, then (5) into Labor Day.

But, don't see 3,000 but 750-1,000 is a good bet intraday if Dow gets to 11,700 first.

wave rust

[Hank Wernicki]

I'll be happy with 1,000 Dow points

Hank

we'll see within a week