I've noted that a few people have cast questioning eyes at my triangle, and the 210 target off it.
Some have claimed that I should be using a log scale on that chart.
Yeah, yeah. I've heard that.
Now let's look at what we've learned the last few days, weeks and months:
There are rumors of a "big bang" financial cleanup coming next week from the Administration:
The “big bang” approach reflects the belief of Tim Geithner, Treasury secretary, and Lawrence Summers, National Economic Council director, that the Bush administration was wrong to dribble out policy initiatives. Mr Geithner intends to present a “comprehensive” plan that policymakers hope will command market confidence.
Details of the financial overhaul are being finalized and have yet to be approved by President Barack Obama, but it may include both the purchase of toxic assets by a “bad bank” and insurance-style guarantees for problem assets remaining on bank balance sheets.
Anti-foreclosure efforts are likely to focus on subsidizing programmes that reduce unsustainable monthly mortgage payments, though there may also be support for schemes that subsidise the partial writedown of loans that exceed the value of the home. Treasury may also unveil new efforts to revitalise dysfunctional securitisation markets.
If this is all they intend to do it will fail spectacularly and the odds of a full-on market meltdown become very high because in fact this is nothing different, in reality, than what has been done thus far - and has failed.
I want to expand on the bond market problem because it is absolutely critical to understand this, and for the Obama administration to put an immediate halt to it.
Prices respond to only one thing in "reality" - supply and demand. Both can be illusory which produces short-term distortions but the truth always pokes its head through and when it does, the direction becomes clear.
Treasury, The Fed and Congress (the previous one) have in aggregate promised some seven trillion dollars in spending they do not have. This of course will eventually require issue of debt to find it in one place or another. The current spending plans of both Treasury and Congress are guaranteed to require upwards of $2 trillion of issue this fiscal year (running through September 30th.)
This last couple of weeks Treasury has been issuing bonds like crazy and as they have bond prices have taken a dive into the mud. Why? Because the supply has to be taken up by someone so that Treasury can fund the nation's promises, and as that supply is taken up money is sucked out of the system to buy those bonds. This then upsets the supply and demand picture in equities.
Reality has started to intrude into the market and it's not a pretty picture. FCBs sold Treasury and so did Primary Dealers in the most recent week. This is new, it is ominous, and it signals that market participants in the bond market have detected smoke in the room. Should they all rush the door at once the bond market dislocation that I have been warning of for months will gather steam and cut off federal funding, along with kneecapping the stock market. The Fed cannot possibly absorb this supply as it will not be limited to Treasuries; they would have to print up literally $20 trillion dollars to halt the collapse and should they attempt it the dollar would collapse instead as that would be a literal ten times over expansion of the monetary base. This would produce a monetary and market implosion twice as bad as what occurred in Iceland overnight.
This is where neoclassical monetary theory meets reality. In the real world credit leads, it is the dog and money supply is in fact the tail. When regulation of credit is abdicated to the degree we have seen in the last five years the resulting credit collapse cannot be avoided through diddling monetary and fiscal policy as the tail cannot wag the dog.
We stand on the edge of the failure of all of American's retirement assets. Literally all of them. Buried in some of the earnings reports of the last quarter are the fact that half of the market capitalization of some firms was wiped out in the last year due to pension fund shortfalls as a consequence of the stock and credit market swoon. CALPERS and other funds are rapidly going from being adequately capitalized to critically undercapitalized. If the Treasury and Stock market both sell off as I believe both can and is likely to happen if the current policies are continued essentially ALL American Retirement Assets will be destroyed - 401ks, IRAs and both private and public Pension systems. Total losses through these systems is likely to reach 80-90%, and the Boomers start retiring "en-masse" just a few years from now.
In short, if policies are not changed now there will be no retirement for Americans and the currently-retired who rely on these funds will find them gone and be forced back into the workplace. Unemployment in that scenario is likely to reach and may exceed 20%, and what's worse, Medicare funding will be severely curtailed at the same time due to the inability of the government to fund it.
It is absolutely critical that Obama and Congress understand these facts (and they really are simple; we have $53 trillion in public and private debt - that is, credit - and yet the monetary base is just shy of $2 trillion up from the "normal" $800 billion or so) - it is not mathematically possible for a $2 trillion dollar thing to control the outcome of a $53 trillion thing, especially when you are threatening to add $7 trillion to it.
Let me put forward a different view of what should be done, and hope that President Obama and his cabinet direct Geithner and company to take these actions. I fully realize that parts of this call for Geither to "turn on" some of his banking buddies, but irrespective of his desire not to, if he does not then the plan will fail.
Specifically, we need to, here and now today:
Finally, for those who think that SPX 200 and DOW 2,000 is a "pipe dream" let me point out that the DOW was at 2000 in as we turned into 1988 and the SPX was at 250. Pipe dream? Not at all. When did the insane credit creation antics begin? Shortly after the 1987 crash, that's when. Here's a long-term chart - you tell me what "mean reversion" takes us back to.
Oh, and yet another basic technical analysis principle is that an "M" formation (otherwise known as a "double top") usually retraces the at least the entire run that produced the left-side of the "M". We can argue over whether that's 200 or 450 - either is really, really bad.
President Obama must decide - he either stands for this nation, the Constitution (as he pledged when he took the oath of office) and its citizens or he stands for the fraud, abuse, and raw theft that has been perpetrated against us all.
The markets have sent a clear signal over the last month - attempting to "borrow and spend" to prop up failed institutions and shield them from the consequences of their bad decisions, when those bad decisions exceed in aggregate the federal budget, cannot be done. If Treasury attempts to issue the amount of supply necessary to fund this it is virtually certain to cause a major meltdown in both the stock and bond markets, and this may be right around the corner as the quarterly refunding is upon us.
There is no middle ground and President Obama must choose.
Our new President was elected to office by the people who were tired of Washington DC influence peddling, pervasive fraud and theft and the economic damage it has wrought on this land. President Obama now has two high-level appointees he has continued to support after they were revealed to have "ethics issues" (at best.) If President Obama does not choose here and now to stand with American citizens and against the fraud and corruption of the previous twenty years he will at best be a one-term President and at worst there won't be an economy or nation worth being President of within the next year or two. The situation really is this grim and neither the markets or the people are going to sit still for any more of "business as usual." Words will not cut it - it is only deeds that count now.
This is not the time for "bipartisanship" or any such thing. It is time for President Obama to demonstrate that he is the leader the people elected and to stand up for the common man - not through "paying back" organized labor with things like "card check" and ordering the removal of disclosure statements of union worker rights related to the ability to "opt out" of political activity, but rather by standing with the common man against the pervasive fraud, abuse, theft and lies that have been perpetrated by Wall Street, K Street and Washington DC in general over the previous twenty years.
The road ahead is a rough one. Our nation faces an unprecedented economic mess of which we have only seen the beginning, but that mess is of our own making. We have "enjoyed" false prosperity for more than a decade fueled by intentionally-overinflated asset prices that represented not real wealth but rather a chimera grown from ridiculous and outrageously fraudulent actions by many throughout our credit, banking and regulatory systems.
The blame for this cannot be laid at the feet of either political party to the exclusion of the other. Both sides of the aisle are to blame, as both have held the reins of power during this period of time. There are dozens of Senators and Representatives who have dirty hands, including many who personally profited from "special deals" doled out by some of these firms, in many cases to the tune of tens of thousands of dollars. Reported frauds have been intentionally ignored and both lawmakers and regulators have not only looked the other way but in many cases have been actively complicit.
Our nation truly stands on the precipice of history. We cannot borrow and spend our way out of this mess, we cannot pass $800 billion dollar "stimulus bills" that do not actually stimulate the economy and we cannot rob Peter to pay Paul. Asset prices must contract to reasonable, supportable values, and they will - whether we like it or not. Those who are overlevered and in debt up to their eyeballs will and must default, and have that debt cleared. Transparency must not be a word, it must be a deed throughout our financial system and markets.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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