Cryptic Remarks

Over the last couple of days (mostly what i read at the end of last week and over the weekend) there has been a marked change in the tone of the doomsayers. The likes of Zero Hedge, Denninger, Mish, etc. have been saying for a while now that this rally in the stock markets is ‘not based on fundamentals’. They’ve all had slightly different takes on who, or what, is driving the indexes higher, and what will, eventually tip things over the edge. Denninger, for example, thinks every Treasury bond sale is going to be the straw that breaks the dollars back; Zero Hedge sees market manipulation in every chart; Mish sees things in terms of deflation, and the falling housing market.

In reality they are probably all right some of the time, but the markets just kept on shaking off the knocks.

Then, over the last couple of days, everything in the media has been about how the recovery has started, the bottom is in, growth has returned… and that seems inherently dangerous. Happy talk.

Monday  saw markets around the world move lower, many indicators are heading back to where they were when Bear Stearns and Lehman Brothers hit the floor… it seems possible that reality was coming back to town.

Personally, i’m guessed that nothing dramatic would happen during the summer, and it would October before we’d see if the system had enough to drag itself over the cusp, or fall back into the pit. Perhaps that’s still a good guess, and this is just a little wobble.

Take a glance at this set of charts, and try to convince yourself that they are all about to start heading in the right direction. It’s not working for me.

On the other side of that coin, take a look at the depths that have already been plumbed and note that The System is still with us. This is the biggest shock that it has been through in almost 80 years, and it’s still hanging on.

It’s too easy to declare that the thing is fundamental broken and beyond repair (undoubtedly correct) and that it it must fail (questionable). The degree of flexibility, and freedom with which elements can be manipulated make short-term predictions very hard.

Really, it’s a coin toss. All of it.


This blew me away:

Individual investors, called housewives after the women who traditionally managed finances in Japanese families, have 1,434 trillion yen ($14.9 trillion) of savings, according to the Bank of Japan.

The rest of that piece seems to be junk… but $15 trillion?! That’s more in savings than the US GDP last year… astonishing.

Really need to understand how all of these fragments of information come together into a wildly dysfunctional, and yet oddly functioning, system. Someone must have written about this… recommendations?

A Little Fun: Redux

Time to face the music.

On Sunday of this week i decided that it’d be fun to make a prediction. In my view it was going to be impossible to sustain the current rally in the US markets. Too much news was obviously negative, and all the attempts to put positive spins on it were getting out of control.

DJI-15-05-09The graph is nowhere near as dramatic as i predicted (or expected) it would be. Still, it was down 5% on the week, the biggest weekly fall for 2 months (back when this rally started in March ’09).

As usual my ability to relate to peoples desire to believe that things are always on the up and up, was my undoing. As far i can tell there is very little reason to optimistic given the fundamentals. No point in going over it all again. I’ll just say that it’s hard to see anything out there in the news that indicates much more than a world economy approaching terminal velocity. That’d be great news if we were talking about an ant falling out of a tree, but it’s not so hot with the full weight of capitalism there to drive us into the ground.

Interesting aside: what on earth is going on with the trading volume spiking at the end of each day? It appears that a lot of parties are closing / taking positions at the end of each day. Perhaps it’s related to trading systems trying to match outstanding orders before the market closes. Should look into it, must be explained somewhere… yes, people closing up positions.

Well, enough of that for a while. No idea what the market will do next week… but i maintain my opinion that we’ve seen the end of this (suckers) rally.


30 year bondBeen watching this graph recently – it has been behaving badly…

That’s the yield on the US Treasury 30 year Bond. You can see the yield being forced down 2%, to 2.5%, from November to the end of last year. Then it creeps back up to 3.5% over a period of several months, where it stabilises until mid-April. At which point it starts to slowly, relentlessly creep back up. All of which raises some interesting questions, like ‘what’s happening?!’, and ‘what does it all mean?!’.

That graph shows the interest rate (yield) that the government has to pay on it’s debt. The more worried that ‘the market’ is about the amount of money that the Treasury wants to sell, the higher this yield moves.

Which would be simple, but of course, things are never allowed to be simple. In order to have some control over the rate, the Federal Reserve (central bank) can print up some new money, and buy the debt from the Treasury.

Unfortunately this ruse doesn’t appear to be working, as you can see – the rate is moving up. How can this be? Surely the Federal Reserve is so powerful, in theory being able to print an unlimited amount of money, there should be no limit to the scope of it’s action.

The problem for the Fed is that the more money that they print, the more the damage the value of the currency. The more they damage the value of the currency, the higher they would be forced to push interest rates to protect it. Not doing so risks crashing the currency, which when we are talking about the dollar is a big deal. The world holds trillions of dollars in reserves, and would not take kindly to having it rapidly devalued.

Another option is to squeeze money out of the equity / stock markets. Money exiting the stock market, seeking safe haven in the bond markets would help stabilise the yield. Or at least that’s the theory… in  my mind it doesn’t really work, or to the extent that it does, is of marginal effect. Someone holding stock decides to sell it, and move the funds into treasuries. For this to happen a second party must be on the other side of the transaction, and buy the stock. Where is the extra money coming from?

It’s possible to argue that the extra money is cash that is sitting on the sidelines (Sideline Cash Myth) but this doesn’t seem to stand up to much examination.

It seems to me that this puts us back in our usual position: between a rock and hard place. On one hand the government needs to finance debt in order to attempt to stimulate the economy / compensate for all the money being destroyed as debts go bad, interest rates need to stay low to keep this debt affordable, and reduce financing costs. And on the other, the currency needs to be protected or the market will not be willing to buy the the additional debt due to low yield, and fears of default.

Therefore the governments of the west are attempting to keep the system ticking along in the hope that enough growth will return to allow the debts to be paid down. At this point in the cycle, the debts are so huge that, i believe, this is no longer possible, or is at best, extremely unlikely.

Keep an eye on that graph. Nothing radical is going to happen now, but i suggest this is how you’ll know who (the central banks or the markets) is “winning” the war.

As an aside, a lot of this talk is about the dollar, but that’s mostly because it the easiest set of data to work with. The same situation is playing out in the other western economies, and the various central banks are fighting the same battle. The interesting exception to this rule, as always it seems, is the Bank of Japan, which despite printing money like it’s going out of fashion, has kept the yield on the japanese long bond remarkably stable. Again, as usual, i don’t understand the mechanism by which this can be explained…

Boundless Optimism!

The worst is over! Or, the end is nigh! I have no idea, but suspect i’m in good company…

U.S. employers cut a smaller-than-expected 539,000 jobs in April, the smallest amount since October, according to government data on Friday that hinted at some improvement in the labor market and the recession-hit economy.

March’s payrolls figure was revised to show a decline of 699,000, compared with a previously reported drop of 663,000. Job losses in February were bumped up to 681,000 from the previously estimated 651,000.

Analysts polled by Reuters had forecast non-farm payrolls dropping 590,000 in April.

Despite being out in their estimate by not much more than the previous months numbers were revised, this change of rate of decline(!) “hinted at some improvement”.

Here’s another idea: with the jobless rate at a 25 year high, the number of jobs that can be immediately axed without damaging the long term health of enterprises is fast approaching. All the fat, the reserves for future growth, are being trimmed away, and what follows will be more akin to weightloss via amputation.

Bear Entrails

Can you tell i’m catching up with my reading?


Over on there are updates of the Four Bad Bears, and Mega-bear Quartet. The first of those links to some pretty interesting looking datasets / discussions. In essence this is now the 2nd worst S&P / DOW market in a hundred years… I’m guessing the Great Depression record is going to be hard to beat. Despite all my cynicism, it does appear that some lessons have been learned in the preceding years.

That being said, the Swiss have started trying to devalue of the swissy, that doesn’t bode well.

Anyway, it will be interesting to see how the S&P tracks the 30s collapse. My feeling is that we’ll see a similar pattern of long decline, punctuated by ‘Sucker Rallies’. The peaks and troughs in those graphs are really maps of human nature, and despite what history tells them, people just want to believe!

Hope. Hope has bought us this far – far enough to shred our hearts to pieces.