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« Fallout of the Crash: Pound Getting Pounded | Main | The Euro Strikes Out »

Friday, May 14, 2010


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Thank you Duncan.
Excellent presentation / analysis.


Y: great post as usual. I was thinking DZZ for a gold short next week based on tonight's STU. Now I'm not so sure.

Here is McLaren's latest. Gives a long term prediction for the spx. Do you think a distribution top well into 2011 is reasonable?



A thoughtful piece from Doug Noland:

Dysfunctional Markets
It scrolled by quickly Wednesday afternoon on my Bloomberg screen: a one-line headline quoting ECB Executive Board member Jose Manuel Gonzalez-Paramo: "Central Banks Can't Work if Markets Dysfunctional." My efforts to located Mr. Gonzalez-Paramo's complete comments on the issue were unsuccessful; we'll have to assume the context. I do believe strongly that many things these days can't work because global markets are hopelessly dysfunctional.

I was never a big fan of the simplistic analytical fixation on the so-called "shadow banking system." Key components of this "system" - i.e. the Wall Street securities firms, ABS, CDOs, SIVs, private-label MBS, etc. - have been reined in. This would imply a more stable financial backdrop, which is nowhere to been seen. I am similarly not a subscriber to a "new normal" thesis. Again, the focus seems to detract from today's key issues. I have posited a "Newest Abnormal" thesis - that the long process of market distortions and economic imbalances has actually accelerated. Things go from bad to only worse. Things may look somewhat different, but there's nothing new.

From my analytical perspective, the heart of the problem lies with this dysfunctional dynamic between global marketable debt and derivatives markets, policy-induced distortions, and unfettered speculative finance. Unique in history, we continue to operate with a global financial "system" functioning without limits to either the quantity or quality of new Credit created. There's way too much Credit backed by little more than government assurances or perceptions of government insurance. And never before has an enormous global "leveraged speculating community" so dominated the markets for debt instruments and, in the process, so relied on faith in the efficacy of government market interventions. It's global wildcat banking in its purest ever form.

These days, entities all over the world issue enormous quantities of tradable debt instruments. This debt, in large part, is purchased by sophisticated market operators earning unimaginable compensation for achieving "above market" returns. When market psychology is bullish, there is essentially unlimited demand for marketable debt - a significant portion acquired through the use of leverage. And as long as demand for new marketable securities remains robust, underlying positive fundamentals appear to support a high market valuation for this debt (irrespective of the quantity issued). But Katy bar the door whenever the crowd moves to cut exposure - either through liquidating positions or acquiring market "insurance."

Eurozone policymakers look foolish these days for not having reined in profligate Greek borrowing and spending. To many, the ECB looks foolish for Sunday's decision to purchase in the open market debt issued by Greece, Portugal, Spain and other troubled European countries. Others believe the ECB was foolish for not having had initiated a Federal Reserve-style monetization plan before the debt crisis spiraled out of control. I sympathize with the ECB. Dysfunctional global markets placed them in a winless situation. Greek 10-year bond yields were below 5% for much of 2009. The market was happy to accommodate profligacy - until it wasn't. If only well-functioning global markets disciplined borrowers rather than emboldening them.

The sea change in global finance gained unstoppable momentum in the early nineties. The Greenspan Federal Reserve nurtured marketable debt as a mechanism to help overcome severe banking system impairment. There was no stopping the historic boom in market-based Credit once unleashed. The problem was clear by the time of the 1994 bond and mortgage securities dislocation. But it was politically and monetarily expedient to allow GSE Credit (with its implicit government guarantee) to evolve into a mechanism for stabilizing the Credit system and spurring economic expansion.

The rapidly escalating scope of the problem was illuminated with the collapse of LTCM. Yet, the Greenspan Fed supported this new financial infrastructure with only more powerful words and deeds. Pegging short term interest rates and aggressively intervening to rectify market tumult incited unprecedented leveraged speculation throughout the Credit system. Dr. Bernanke's 2002 "helicopter money" and "government printing press" speeches sealed the fate of runaway Bubbles in both marketable debt and leveraged speculation.

Especially during the Bubble years 2004 through 2007, massive U.S. current account deficits worked to unleash U.S. Credit Bubble dynamics upon the entire world. The more Bubbles became ingrained in the financial architecture the deeper market perceptions became that policymakers wouldn't tolerate a bust. Worse yet, policymakers resorted to using the debt markets and the market's propensity for leveraged speculation as mechanisms for increasingly aggressive monetary reflation.

Global policymakers and Credit markets have been fueling Bubbles and accommodating profligacy for years now. It would have taken a concerted effort by global central bankers to rein things in. The Greenspan/Bernanke Federal Reserve would have had no part of it. Quite the contrary. It was fundamental to Greenspan/Bernanke doctrine to deal with market and economic fragility through the aggressive reflation of system Credit. This doctrine of inflationism was instrumental in nurturing Credit and speculation excesses that worked over time to increasingly distort the pricing of finance, the quantity of Credit created, and the allocation of real and financial resources. The ECB's big mistake was not to forcefully fight the Fed.

We're now two years into the greatest expansion of global government debt in the history of mankind. Manic-depressive debt markets have pulled the rug out from under Greece and periphery Europe, but in the process have further accommodated profligate government borrowings here at home. It is frightening to think of how distorted the Treasury market has become - and how things might play out down the road.

My bearish thesis on our markets and economy is based upon the view that the financial fuel for our recovery has been unsound, unstable and unsustainable. This "Monetary Process" is now in jeopardy. The Global Government Finance Bubble, which lunged into its terminal phase of excess with the collapse of the Wall Street/mortgage finance Bubble, has been pierced. Greece's debt crisis marks a momentous inflection point. And, yes, some government markets - certainly including Treasuries - are benefiting from Greek and periphery European debt woes. Yet key Bubble dynamics percolate under the surface.

I have argued that the Global Government Finance Bubble has been the biggest and most precarious Bubble yet. The incredible scope of global sovereign debt expansion over the past couple years has been rather obvious. Less apparent are related distortions - to the pricing and allocation of finance throughout international markets - based specifically upon the market perception that politicians and central bankers would act aggressively and successfully to forestall future crises. This policy-induced market distortion fostered an incredible bout of risk-taking - especially considering the fundamental backdrop - and a resulting massive flood of finance out to the risk markets. This perception has been blown to smithereens in Europe and has quickly become vulnerable everywhere.

Global markets in sovereign Credit default swap (CDS) protection have flourished on the assumption that policymakers would thwart any debt crisis. In the post-Greek debacle era, writing insurance against a government default is no longer free money. New realities have profoundly changed the risk and reward profiles of operating in this key market - and I'll assume some profoundly less attractive marketplace liquidity dynamics going forward. And a faltering market for sovereign debt insurance significantly changes the risk profile of owning the underlying sovereign debt. To be sure, changing perceptions in the market for government debt work to corrode market confidence in the capacity of policymakers to stem financial and economic crises generally. This implies a major adjustment in the markets' perception of risk in various markets, including corporate, municipal and mortgage instruments.

But I'm getting somewhat ahead of myself. Thus far, dislocation in Greek debt has fed powerful contagion effects throughout European debt and CDS. This has forced a major market reassessment of the relative stability of the euro currency, which has unleashed bloody havoc throughout the currency and "carry trade" arena. Currency and "carry trade" tumult has forced market reassessment as to near-term prospects for both the dollar (upward) and global growth (downward). This has caused trading liquidation and de-leveraging havoc in the enormous global "reflation trade" and in risk markets more generally. And there's nothing like liquidation and forced de-leveraging to really bring out the animal spirits for those seeking to make nice speculative profits from others' misfortune.

The dollar and Treasuries have benefited. This has supported the bullish view that this is largely a European issue. It has also helped dampen the impact to our markets from changing global perceptions with respect to the capacity of policymakers to stem crises. Here in the U.S., Credit spreads and risk premiums (corporates, MBS, municipals, etc.) have widened some. Yet faith still runs deep that Washington won't allow a crisis. This confidence must hold for sufficiently loose U.S. finance to continue to support our fragile recovery.

The confluence of global financial crisis and intense financial sector scrutiny here at home will at some point prove confidence in Washington overly optimistic. For now, when it comes to pricing risk and disciplining profligate borrowers, our debt markets remain dysfunctional.



Stripping out the Central Bank bullshit:



Given the GLD ETF is aggressively long by Soros, Paulson and lots of large and small hedge fund, the sentiment is definitely on one side. The flight to anything non-paper is nothing but another speculative run, like what it use to be Treasury. As soon as the crisis trumpeted by all the TV and print media, we have it done.



Agreed. When deflation rears it's ugly head again, it will come as a major shock to most. People are absolutely hysterical over gold. I haven't seen this type of sentiment since gold started going up 10 years ago.

vipul garg


maybe evil speculator can enlighten us with the stop loss that that he presumably has on gold shorts .
i hope he is meaning to say that in the least the medium term top of gold is there and not just a decline to 1170 levels.


"Gold may longer be cheap, but it may not yet be in a bubble."

Remembering back to the last gold bubble, I sold my high school class ring (14k) at the top in 1980. Everyone was talking about gold, which drew my attention to the action. I needed the money. I had no idea that I was planting the seeds for my future as a contrarian trader, i.e. - against the trend.

So here's what I think, you know, as a guy who looks for the trend to end, the quoted text from Duncan at the beginning of my comment says it all. Gold may have a long way to run based on all the valid arguments about fiat money, but it's still close enough to a near-term trend line that you'd have to be crazy (and this is coming from a guy who loves to take the counter-trend trade) to short it at this point.

A genuine blowoff, like 1980, could add hundreds of dollars to the price of gold in leaps and bounds. Just pull up a chart of the daily action back then to see what I mean. When we finally get that jaw-dropping action in the price, with big, big upward spikes, then sell.


this is what a short-seller is looking for with the price of gold:

see that action yet?


Yelnick... very interesting post!
Any guesses on what new BS will come out Sunday night to save Europe and give us the Monday pump?
Anybody have a guess?

Hank Wernicki

A Clear Buy for Monday

vipul garg

like the chart .
"see that action yet?" is quite emphatic.


Hock, a rolling, topping action into 2011 is plausible, and it is what I have been expecting, but the odds for it are dropping with the Euro. It would be driven in part by continued expectations of a recovery in the US and earnings increasing across the S&P. Now it appears Europe will double dip first, an inevitable consequence of austerity, and bring down the US sooner than 2011. One might hope the Euro-TARP will flood liquidity into Europe, but the ECB seems determined to sterilize any bond purchases, hence the money in Euros should remain tight. Once the US market sniffs the double dip, the S&P is done for the rest of the year. We are not there yet ...


MHD - the ECB and Fed need to spawn an intervention or the Euro will slide to $1.18.


Thanks Y:

Dent doesn't think so either. Here is his latest, sent out early last week. I'm assuming, because of the format, utube, it is in the public domain:



What gold is responding to:

Fluck me! Ronnie Reagan was no stranger to the candy jar, that's quite clear. But Obama's smashed the thing on the floor. It will be interesting to revisit the charts after he finishes up. First prise, I'm sure.




Hick, thanks for sharing. His point is the investors still think the govt will bail them out of risk. As GDP slows & the second wave of mortgage failures commences in spades, he expects a crash. That had been my view. If the Euro TARP is seen to visibly fail, which it might within a few more weeks, that will put investors on alert that maybe the Fed is done, too, and this could all unwind quicker than in Q4 or Q1 2011


Hock, this shows that Clinton was a pretty good "Republican" President (ie kept a lid on better than the bookends of Bushes). The dad had one expensive year (his first) then settled down - call it Gulf War syndrome. The son was a fiscal disaster. The conclusion: borrowing or taxing matter less than spending. Now that Obama is growing spending, whether the horrific borrowing or tax increases to come are the path chosen, we now have a structurally hard time growing out from under the overhang.


Hock, this shows that Clinton was a pretty good "Republican" President (ie kept a lid on better than the bookends of Bushes).

It happens to go deeper than Clinton. This graph gives a clearer view of what has actually transpired since WWII.

Ike was the last Republican to really act like one. I liked IKE and still do. A great leader, yet he did not try to act like one. This was what made him so great.

In more recent times the bout of spend spend spend started with Reagan, there is little doubt. Besides The Whiz Kids, we have been duped during all of this by 'The Hollywooders'. The great actors. Listen to what I say, but pay no attention to what I actually do. It has worked for them.

David Stockman was a decent dude and has written quite a bit about the Reagan budget years. David imo was good Republican. I think he more or less bowed out in disgust. Stockman's career since all this happened is a bit interesting, in particular his successes and failures in WS activities.

How a true died in blue Republican can remain a loyal part of that party or the philosophy that party has put into motion over the last 30 years is beyond me. Guess that is more than likely why we now have Tea Baggers.

The greatest off the record quote of all, by Cheney no less ..."'Reagan proved deficits don't matter," Dick Cheney told Paul O'Neill during a Cabinet meeting. "We won the (2002) midterms. This is our due.".

Well I think we are about to find out how much debt does matter.

And yes Clinton was in many ways a good Republican. This is why they despised him so much. And it is also well known Republicans are on average hornier than Dems, this forms the basis as to why Bill packed and used a Big Cigar.

Politicians. They never fail to impress (or depress). Life is like a box of chocolates.



ns, great comment! Milton Friedman suggested huge deficits to put the end to increased spending, but instead we learned to stop worrying and love the debt. Tax & spend, borrow & spend - spending is the problem. The Repubs simply blew it. If this thing gets really bad, maybe one of the parties goes away and is replaced by a truly fiscally-conservative party - a blend of Ron Paul libertarians and Repub traditionalists who still think balanced budgets are a mark of sound government.

Before 1896, the Demos were the party of sound money. They flipped, and the Repubs adopted gold. It took Hoover to screw things up. After that it was up for grabs.

In the last 3 elections, given Clinton's record, the Demo's could have reclaimed the mantle of fiscal responsibility, but Obama has blown that.

I wonder if the Keynesian cheerleaders are doing the math: if we have an L shaped recovery, or a W, there is no scenario in which the recent excess spending can ever be paid back by increased GDP. At best we follow Paul Ryan's path, and try to eek out salvation in a slow slog over the next century.

Your guy Ike was right to be careful and pay off the WWII debt before chasing the elixir of debt-fueled growth.

Mr. Panick

I think gold is the candidate for bubble of the decade (2001-2010) just as tech stocks were during the previous decade. Mr. H. is looking for a candidate and gold seems to be complying putting in a final blowoff top in the "0" year. But Mr. H believes $ will be toilet paper by 2013 and gold has much more to run. Gold though has a way to go to get overextended now.


Karl Rove was recently ranting about the GOP's chances this fall.

Not so fast Karl.

Who will win is much less clear than who is mostly likely to lose (incumbants).



Mauldin's latest:

Note his comments on Ireland.

On my wish list: Bloomberg forms a Libertarian Party.



Hi Yelnick,

Long-Term chart of SPX updated: Two possibilities - a giant bearish H&S, or a bullish Megaphone pattern.

BTW, Good analysis on gold.

The problem with all this printing and bailing out, is that it is keeping alive the WRONG PART of the economy.

The healthy part - the productive private sector - is wilting and dying, being taxed and red-taped to death, or starved for credit. While the unhealthy loss-making and resource-consuming part of the economy is being kept on life support.

The problem arises because we seem to think that so long as they keep consumption intact, all will be fine. This is a badly-flawed notion of economics. And with such flawed thinking, the wrong sectors live on, to consuming resources, while the productive parts shrink, making it more difficult to restore a balance between taxing and spending.

We will all be paying a heavy price for the unsound economic thinking of our leaders.


I hope the market does bounce so I can short some more, because did you notice how it looked ending-diagonalish the last few days? It's going to at least DOW 10,200. Furthermore, it's eventually going lower than that because we're correcting for several more months.



Your Dent comment:
"His point is the investors still think the govt will bail them out of risk."

Well, the Gubmint is going to be one busy outfit and maybe it helps explain this recent retirement poll by the Employee Benefit Research Institute. Fully 47 percent of those polled had saved less that 10,000$ for retirement and 27 percent had less than 1000$. If 6 years of down markets are in store for us as Prechter predicts and boomers are entering peak retirement/savings years as Dent lays out, and given that we are sniffing around a debt/GDP ratio of 100, where is Obama going to get the money for his Great Society? And more importantly, how can anyone with a clear head not be preparing for a serious decade of deflation. Given the above, how can the velocity of money not decay badly in the months and years ahead?



Three Cheers for the strategic defaulters:

I could not agree more with this strategy.


Hck, it appears markets worldwide are getting the message! They don't believe in the Euro bailout. As with Creditanstalt, it is only increasing the race to take the rescue and get out. Now we will see a war on public unions. As MIsh says tonight, simply outlaw them. They serve no purpose other than to line their pockets at taxpayer expense.

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