That Sinking Feeling: G20 Busts the Government Bubble

The Keynesian Cheerleaders have met their moment of truth: gas or brake? Geithner went to plea for more stimulus from Europe and Japan, betting that more deficits now will produce growth and future taxes to pay down the debt. The Europeans have hit their limit and politely told Geithner where to go. 

The Government Bubble has just burst.

Hungary is about to join the PIIGS with unsustainable debt, and the Euro has broken below the recent trading range and is below $1.20 - down from $1.50 not so long ago. The next support is around $1.16-1.18. It is in a wave 5 down and could easily overshoot these levels. 

All the rescue plans have been for naught, as the wolfpack continues to call the bluff of the finance ministers. Now even the core countries of Europe are seeing spikes in their CDS spreads. This witty video from Australia gets across the point that investors have figured out: indebted nations cannot bail out the broke nations. 

While the sudden surge in core country CDS spreads may abate, it appears we have crossed a very critical threshold: belief in the wisdom of assuming debt for temporary stimulus. The Illusion of Stimulus has been punctured. The Keynesians have no clothes. 

There is anger brewing over the failure of Keynesianism: people feel like they have been sold down the river with false promises of easy money in order to line the pockets of overpaid public workers, nefarious bankers and corrupt politicians. 

There is no one in the blogosphere better at projecting that anger than Karl Denninger, who rants that the attempt to re-ignite private credit growth has failed. By his calculation, we borrowed 12% of GDP last fiscal year, and are on track to do it again this year - levels well above the 5-6% of Hoover and FDR in the Great Depression. With the backlash against this growing, the US may be forced to pull back to a more sustainable 3-5% level. That drop of around 8% will come out of GDP by the way it is calculated, whether it is a drop in spending or a massive increase in taxes, icing the coming double-dip recession.

With total government debt at 130% of GDP in the US (including State and local debt as well as unfunded future obligations), this point was inevitable here as well - our leadership simply has not been prepared to come to grips with the dimensions of the problem, blindly having faith in Keynesian prescriptions. 

 

Obama's Summer of Disillusionment is upon us. His cool, collected style is now viewed as a profound failure of leadership. Already his most visible gushers of support have begun to publicly air their disappointment (Maureen Dowd, Tom Friedman, Frank Rich, even Chris "I get a tingle down my leg" Matthews). James Carville rebukes him for his failures with the oil spill. Quietly, his army of true believers are bailing. 

What happens now is laid out by Karl: we are entering an Austrian-Economics style debt-deflation spiral, and there is no longer anything the government can do to prevent it. 

The size of potential fall in private debt is well beyond the ability of the government to fill ($52T of total debt vs $13T of Federal deficit). We were at about half that total amount of debt just a few years ago when the Greenspan Bubble began ($26T vs $52T), and we may be headed back that far. Bubbles tend to retrace to their start. Hang on to your hats. And wallets.

Comments

[Wave Rust]

Is SPX 1165 available for an overnight stay?

Set your trading GPS for that target.

Shorts and a blazer don't work together, except in the fools parade.

The whole move down has the same signature of the October '08 low and the Feb'10 low.

I think the sideways action from October '08 through November '08 is repeating. It scared the crap out of everyone before ,,,, it should work again.

The markets are still an investor's nightmare, but a trader's smorgasbord.

There is only one bus driver in the markets ,,,, just one. Figure out who it is and win. Just get on the bus.

Blazer week ahead.

wave rust

[Mamma Boom Boom]

I'm anticipating a wild ride tomorrow. Already started biting my nails, just for practice.

[Wave Rust]

Obama is really good at what he does - speak from a teleprompter.

Smart? No. Intelligent? Not really. Moral compass? None.

Over-achieving narcissist? Absolutely!!

Over-achievement so far - He has already become the worst President in modern era history, and, in less than half the time it took the 2nd worst president, Jimmy Carter.

It took Jimmy 3 years before the spiral downward ended mercifully at 444 days, when Ahm-a-nut-job released the hostages.

"It can't get any worse than Carter!" LOL

Never underestimate the gullibility of the American voters. But never forget what they do, when they find out they have been fooled by bullchit artists ,,,, Kennedy, Johnson, Nixon, Carter, Clinton, Obama

The anti-Obama sentiment will peak when some Democrat forms an exploratory committee for the 2012 Democratic Presidential nomination. Just like Ted Kennedy did to Jimmy. Obama will become yesterday's bad joke.

BHO is getting his "Truth Out" moment. Like Joran Vanderslut is. Pandora's Truth Box is opening.

Marxism came to America to die a final death. Death watch has begun.

somehow, we always middle through.

wave rust

[Wave Rust]

yelnick,

I like that Dutch idea of an inverted ship over the oil well ,,,, especially if it helps while they drill relief wells.

wave rust

[yelnick]

Wave rust, the inverted ship seems tricky to get down thee correctly but would seem to solve the problem. NSpolar, what thinks you?

[yelnick]

Wave rust, nice rundown of politician foibles and the fall of BHO. It has always struck me that the people think politicians are stupid, whereas it is pretty clear they are not - they get away with stuff and the voter looks stupid. Sen. DeMint has decried secret bills being run thru this Congress, snuck out without public scrutiny. And of course the last four bills that we did say are abominations: Porkulus, Omnibus Budget, ObamaCare, and now the pending Financial Reform (Deform?).

Maybe the primary in Cal this Tues will start pulling down some of the foundations for the deceitful running of this country. NJ has their savior; Cal still needs to finds their governator.

[upstart]

Although I'm a Carl Futia fan, I don't know why he expects the market to finish correcting and head to new highs now, after rocketing straight up for 13 months. I don't believe this larger correction is over after about a month - the same time as the smaller corrections since the 3/2009 low. The corrective period will last a while longer; it will be the 4-yr. cycle low. My guess is that a new high above April's will not come until next year, for reasons I have hinted at. The top of the rally will come sometime then, and we see the big slide into late 2012. The uncertainty surrounding the presidential election will be part of that.

[Chabazite]

Good post Yelnick

[rc]

So, if we're entering a debt-deflation spiral, then why is gold at record highs? I know Prechter has long forecasted lows for gold and yet it continues to climb.

And what about yields on treasuries? Will these go down (deflation) or up (risk of insolvency)?

Savings rates are now less than cpi -- due to the fiscal irresponsibility of the Fed bailing out banks. Where to invest (not just trade)? Inflation or deflation? Real investments (companies, commodities) to ride out inflation or keep in cash that's currently losing value?

One thing is for sure... the world economy is a mess. And that seems due to interference causing unintended consequences (as Yelnick often points out) leading to more manipulation and more consequences. But, what is the prudent thing to do individually when everything, even once conservative investments, has become a casino game?

[rc]

A bit off topic, but I read that BHO may be proposing an end to the moratorium on commercial whaling that has been in place since Reagan pushed it in the '80's. It's supposedly a pragmatic position -- whereby whaling is allowed but the numbers are more controlled as opposed to the current situation of Norway, Iceland and Japan feigning scientific research (and then selling whale meat for pet food).

In any case, this is a surprise. If this was Bush, I have to imagine there'd be serious consternation. Yet, I only saw the news item carried on Fox's website. So, that's interesting. Is the media truly this beholden? Regardless, if this does occur, it'll eventually filter out to the public and cause disillusionment. And, it seems to be politically tone deaf. I still don't have a good sense of BHO's ideals and motivations... this is puzzling.

[Gooner70]

With regard to your question re:Gold .

I have speculated the same with regard to Gold for some time. - One strategist I know believes that over the last year the inflation/deflation debate has split investors pretty much down the middle(or at least close to it). - Hence owning a portfolio with Long Bonds and some Gold provides cheap insurance against either extreme outcome, which is further helped by the cost of carry on both. I.e. With short yields almost zero, Gold has never been as cheap to hold, whilst owning Bonds earns a nice little carry premium. - In which case if (as is increasingly seems likely), a deflationary spiral takes hold, then perhaps these investors may scale back their holdings of Gold, and possibly lower Gold prices lie in store.

Another popular argument I have heard is that Gold is a great hedge against uncertainty (i.e. Major Sovereign Debt Crisis/War/Major Civil Unrest, etc.).

Finally, there is the hyper-inflation argument. Bernanke has stated his willingness to do anything to stave off deflation, which suggests a willingness to eventually turn-on the printing presses to maximum. The result would almost certainly be inflation and hyper-inflation. Which for some is the long-term argument for holding Gold. And which may be a reason why perhaps even if Gold does get sold off in a deflationary scare, then perhaps there is a large resting bid somewhere below.

I am sure there are further reasons and opinions.

[yelnick]

rc, you ask if we are in a debt-deflation spiral (irving fisher's explanation for the GD) why is gold soaring? Because the powers-that-be have tried to inflate their way out of the mess. Last time Hoover ran deficits up to 5% - this time we are at 12%. In neither case did it work. Now with the G20 fiasco for Geithner this weekend, we finally have economic sense returning to global leaders (other than the US). Somebody had to finally realize you cannot borrow your way to prosperity - it has to be earned. 

Now that this foolishness is behind us - except for perhaps one more US attempt before the mid-term elections shuts this down - we should now see gold peak and the deflationary forces emerge with a vengeance. The next big shoe to drop appears to be the coming option ARM resets, followed by the dreaded double-dip down. 

"Give me Liberty or give me Debt!" - the modern tea party slogan

[betterdays]

Regardless of Monday's action market doing much lower ..under 9,000 on the Dow..with rallies just a chance to sell short

[Roger D.]

Real estate is back to 1999 levels and heading for 1990. Just think the Fed has 3 trillion dollars of this crap,poor Ben. This is going to be one big haircut, as the Euro heads for parity and the USD soars past 90 on it's way above 100.

Watch the volume, a big spike and down we go.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/87ea08c9-1e41-4e3e-aa28-bc5769be03ac

[Michael]

Wave,

I must say that I find your list of bullchit artist Presidents to be quite interesting... However, I am at a loss as to how you could leave George Bush off that list!

I guess you forgot that he doubled the National Debt during his Presidency, not too mention re-appoint Alan Greenspan ( who caused the Bubble in the first place ), not too mention start a war that has cost us over 4,000 lives and over $1 TRILLION DOLLARS, not too mention his Secretary of Treasury bailing-out all of the Banks to the tune of $700 Billion, along with General Motors, or the moron of an SEC Chairman that he appointed (Christoper Cox) that was totally asleep at the wheel, along with FERC Chairman Pat Wood III, who allowed Enron to run free and manipulate the California power grid and sending the 6th largest economic power into a recession.

How you could leave Bush off a list of worst Presidents ever, is absolutely beyond me.

Your political BIAS shows about as badly as some of these Perma-Bear EWT "gurus" who have lost a fortune shorting the US equity market in anticipation of P3.

And that's pretty bad.

:)

[Roger D.]

Futures look a little nervous 1052. A break away gap is in order here.

[Bird]

Roger D. I've been watching your posts with interest. You speak with conviction and for at least some time now, you have been on the mark. Can you describe the main aspects of your analysis?

[Roger D.]

http://www.screencast.com/users/parisgnome/folders/Default/media/76bf4c9c-caa9-484f-853a-b6ebe624a6d4

Bird, My analysis, sure pretty simple, the rising wedge off the March low. I thought January was the top,but it expanded and reached the 1217 high. That was the top, as the banksters rung every last drop out of it. The pattern implies extreme weakness going foward. So far it is textbook perfect. We had a break(fat finger 1000pts), the sharp rally back to the trendline and now the decline has started in ernest. We should reach the base of the wedge at or about June 21st.

Good Luck,

Roger D.

[Roger D.]

I would think that this Hang Seng chart would scare the crap out of any bull, but then again.

http://www.screencast.com/users/parisgnome/folders/Default/media/dffd03bb-9be0-4c0b-8d8a-634ad1aa115b

[rc]

"we should now see gold peak and the deflationary forces emerge with a vengeance."

It'll be interesting watching how this unfolds while reading the commentary from this site (an often recommended favorite). It does seem like deflationary forces are becoming more evident.

[Steven_737]

Hello Duncan
and fellow posters (traders and paper-traders)

JUST CHARTS

http://steven737.typepad.com/blog/2010/06/global-dow-daily-chart-06062010-.html

http://steven737.typepad.com/blog/2010/06/global-dow-analysis-06062010.html

http://steven737.typepad.com/blog/2010/06/eurostoxx-50-analysis-06062010-.html

http://steven737.typepad.com/blog/2010/06/dax-analysis-06062010-.html

cheers :)

[Rally Time]

Time for the Bulls to rally baby!!!!!

http://www.rallymonkey.com/oldvideo.php

smoke those bears!

[Rally Time]

If you make noise he will come

http://www.youtube.com/watch?v=aziWSxqGBD4

[Steven_737]

I suppose you would like some CME charts too;
there you go:

http://steven737.typepad.com/blog/2010/06/es-spx-analysis-06062010.html

http://steven737.typepad.com/blog/2010/06/nq-ndx-analysis-06062010.html

Duncan I have read your comment about Friday's 15 min chart count; perhaps you are right; but I still go by the count posted. We will see.

I think you will like the "Global charts".

What does the bifurcation method reveal on those charts??

Still waiting for the "promised" article on bifurcation.

cheers :) :)

[Roger D.]

Looks like it's going to be a long night for all the markets. It's hi-fi time and some good music.

Good night all,

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/dccb5bb0-c825-48cd-9c82-78ce10d9812b

[yelnick]

Steven_737, my bifurcation podcast still awaits a good block of time. Looking at your charts, we have not yet bifurcated out of the recent plateau in a Es1055-1107 range.

Interesting count which I could call The Bigger Tease is: we drop to Sp1000 to end an LD wave 1 down, then bounce in a wave 2 which retraces at least 50% of the whole drop (1220-1000 or 220 pts) so goes back to 1107 area, which makes sense since often a retrace goes to the 4th of the prior 3rd, which is the start of the current plateau. It works a little better with a drop to 970 and a bounce 125 pts back to 1095. Would make a nice summer rally and has two huge consequences:
- many bears wil get caught expecting a drop to Sp860
- many bulls will pile on after a big apart of the run back up, and then will find it falls about when they least expect it

[Rally Time]

This market is gonna explode higher guys.

Bears are getting nervous.

[Rally Time]

Rally monkey is ready and standing by for launch....

http://www.youtube.com/watch?v=SB_TWMx7tqQ&feature=related

[Rally Time]

Here is the Hurst cycle chart. After some morning shenanigans, market should slingshot back to the upside.

http://images.investorshub.advfn.com/images/uploads/2010/6/6/kmjkv0604d1.gif

[Hockthefarm]

Yelnick:

Great post. It is rewarding to see that every bit of it was essentially predicted in CTC.

It's pretty clear that we will eventually have to cross the Rubicon. The sooner the better imo, just look at Japan. I bet they would like to wind the watch back.

But my biggest disappointment has to be the utter contempt Obama holds for future generations in this country. Massive, massive debt growth for a decade. It is nothing but a share cropper model. We need changes in the constitution to protect future generations from this behavior. At least they will have cheap housing and plenty to choose from by the looks of it.

Hock

[Hockthefarm]

"This market is gonna explode higher guys."

Rally Time:

I couldn't agree more. Don't know when it starts, but I think we rally into the last week of July.

Hock

[min]

Real estate is back to 1999 levels and heading for 1990.

Posted by: Roger D. | Sunday, June 06, 2010 at 05:41 PM

There are areas in So. Cal where houses are still selling for about 10% below their 2007 peak value. I wish you were right on your assertion, I live in one of these places and would be buying without hesitation if 1999 prices were available.

This Friday sell-off really has you seeing Armageddon doesn't it?

[Account Deleted]

Micheal !!

What a post about Worst president being George Bush.I give u ten on ten for it.Bush was easily the worst president US ever had(one more a little less worse was his father who unnecessarily fought Iraq in 1990s).No one can match his foolishness,not even Jimmy carter.I dont need to mention his acts of foolishness as u have correctly mentioned them in your post.

Just one thing u have missed out and that is that "George Bush Even LOOKS Like an IDIOT HOMOSEXUAL MORON" (his homo-partner being TONY BLAIR)

Regards
VB

[Roger D.]

"This Friday sell-off really has you seeing Armageddon doesn't it?"

In 2007 on the Prudent Bear page I called it the Armageddon top,the financial kind.

The markets rally so far has been not what the bulls have hoped for. The MCD chart has limited upside,unless it pops here up to the 68 area. I think 67.20 should hold. Then we should start wave 3 of 3 sometime later today maybe. The USD/EUR is in a wave 2 so whenever that resumes the decline the makets will follow.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/635fc3cd-da0b-4eaa-beb7-44df46f524d6

http://www.screencast.com/users/parisgnome/folders/Default/media/1c554a15-5edb-45d8-b87e-28074d9c1031

[Roger D.]

Interesting that MCD has retraced already and the Dow as of yet can hardly stay in positive territory. So far the market is performing in the extremely weak grade,which is exactly what it should do.

http://www.screencast.com/users/parisgnome/folders/Default/media/e482bec4-028b-4717-a750-bc7231d104ff

[DG]

Then we should start wave 3 of 3 sometime later today maybe.

There are no "3 of 3" waves setting up ANYWHERE on ANY CHART in ANY ASSET on ANY TIMEFRAME.

[Roger D.]

DG you are wrong. this market has been making a top here for 11 days and will complete "E" shortly of a 5 point reversal. Get a clue pal.

Watch out below!

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/4dd8cfd2-da03-4b2b-b03e-6b643fe2f161

[DG]

Roger,

I've watched your posts for almost 6 months and whenever I've disagreed with you, I've been right and you've been wrong. I'm not exactly shaking in my boots that this time will turn out any different.

Your wave counts are a travesty and entirely without logic or rules, other than 'Roger D thinks the market's going to collapse, so let me slap a wave "1" label here and a wave "2" label here and claim the market's going down in a wave "3"'.

You do that EVERY TIME. Yes, it is possible you will get lucky and there will be a decline from here, but any resemblance between your wave count and actual market behavior will be purely a coincidence.

[Mamma Boom Boom]

DG, ....loved it!

[Roger D.]

W'ell see who laughs last. You better tie a bungy to this thing, Rome is burning.

Roger D.

[Mamma Boom Boom]

>Rome is burning.<

It has nothing to do with the technical condition of the market.

[Roger D.]

You bulls are going to get your ass kicked. There is nothing bullish about this chart,nada,nothing. In fact we are setting up for a collapse.

You have a failed "c" at my (2). This market cant even rally today,even though it is oversold. There are topping patterns all over, and this GSC wedge gains credibility by the hour.

Neowave and Tony C. haven't a clue. They see 5 waves off the bottom and think this is a new bull market. Bullshit, I told Tony C. he was wrong at the top in Oct 2007. Nothings changed.

The 5 waves up are a hybrid wave thrust up in a supercycle "E" . IBM,AAPL,AMZN,BIDU,MCD all have finished their grand supercycle tops and now the market will finally get in gear on the downside.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/a2e4cc3e-327d-4b82-ad85-6f440a22b4cb

[DG]

You bulls are going to get your ass kicked. There is nothing bullish about this chart,nada,nothing. In fact we are setting up for a collapse.

That's a simplistic way of viewing my perspective. Because I don't agree with your completely baloney "3 of 3" count, I'm a bull?

Neowave and Tony C. haven't a clue. They see 5 waves off the bottom and think this is a new bull market.

Neely hasn't said anything about a "new bull market" and never has since the March 2009 low. If anything, he was clearly too bearish most of the past year. The fact that you made that mistake is just typical of the sloppiness of your work in general.

DG, ....loved it!

Posted by: Mamma Boom Boom | Monday, June 07, 2010 at 10:34 AM

:)

After seeing chart after chart of apocalyptic "Grand Supercycle" utter garbage, I just wanted to chime in. Yes, we could, and probably will, go down further over time. One option would take us just under 1000 SPX, if normal relationships apply.

[JT]

Roger,

For someone that claims to have been trading since 1974, I (as well as others here) sure find your charts and claims to be far too arbitrary to be of any value.

For once, I actually AGREE with DG.
Neely has NEVER said anything about this past advance being the beginning of a new bull market.

You really need to "check" yourself Roger. Reading in between the lines, your posts come off as a BEAR that got his ass kicked by this rally, who now is pounding his chest about being right like a broken clock being "right" twice a day.

Good luck with that approach.

:)

[Roger D.]

JT,mamma,DG,ect Kiss my ass & GFY

Roger D.

[DG]

Roger,

Sometimes this forum is all about who's the BSD and other times it's about trying to bring people along the learning curve with e-wave. Unless you believe that you know all there is to know about e-wave, you have to believe that there are others who know more. Otherwise, as I have said regarding your counts again and again, it is all just subjective and we can throw out counts like they are going out of style because, hey, who knows who's right.

As I told you in February, the last time you were screeching about a "3 of 3", that count is WRONG. No amount of telling me to go f*ck myself will make it right and no amount of "he who laughs last laughs best" bravado will make it right, either.

Right at this second, short is the place to be, so, as I said, the market will go along with your count for a while, but it isn't the opening phase of Armageddon.

[Mamma Boom Boom]

>JT,mamma,DG,ect Kiss my ass & GFY

Roger D.<

Roger, you gave me the giggles on a rough day.

[Roger D.]

>JT,mamma,DG,ect Kiss my ass & GFY

Roger D.<

Roger, you gave me the giggles on a rough day.

Mamma your a good sport...I promise to be nice to you.

The chart action says one thing loud and clear....relentless selling. Every rally is met with more selling. I expect to see the E-mini move down to the 1040 area tonight and possibly 1030. Baby it's on!!!!

http://www.screencast.com/users/parisgnome/folders/Default/media/9fb289f0-0080-4891-a815-5f81f8a15ccb

[Mr. Panic]

Roger,
Nice chart with the e-mini. It looks like 1052 should now become resistance. E-mini was trading at a huge premium to cash there for awhile.
As for a wave count, it's hard not to argue that we're in some sort of 3. McClellan Oscillator made an all time negative reading on May 20 and it has another one coming on Thurday.

[Roger D.]

The Grand Supercycle rising wedge in the Dow, now in 3 of 3.

http://www.screencast.com/users/parisgnome/folders/Default/media/d4d2c486-c080-4e4c-a636-38b89fd95987

Roger D.