All right so we have a lot of noise regarding Obama's plan to redo the infrastructure and create jobs worth 450 billion dollars. Then comes Europe where the risk of a Greek default is imminent and alternative of quantitative easing is supposedly, being explored by ECB. The central bank of Swiss feels enough is enough of CHF being a 'Safe Haven' currency and decides to fix up the exchange rate. Let us take all of these things in perspective first.
US Infrastructure: Whatever little I know about infrastructure is all about Houses, Office Complexes, Roads and Rail [leaving the service infrastructure like schools and medical care centres just for simplicity]. Housing prices are steadily collapsing despite all the TARP liquidity injections. [A full detail on the anatomy of how bailed banks are profiting from the bailouts is given very well in the ebooks by Nadeem Walayat on Market Oracle]. So given the demand and supply situation of the housing market, the trends clearly show that housing prices are yet to see a bottom in more than 70% of the locations and the rental per unit whilst increasing as of now, will again drop as the next economic slowdown comes again. Roads will probably need some repairs but that is not going to create some great long lasting projects to feed people for life. Rails are in need of some upgradations but it still goes to show that this is not enough. Schools, medical institutions etc are also in need of upgradation and also new creations; fine. However, this entire package still does not spell out in concrete terms, 'How' this plan is going to boost the economy and provide for jobs. Second, it does not spell out 'How will this project be funded'
The answer lies in the past actions; one would be to sell T-Bills which are nothing but IOUs of fiat money. Today the question is who is going to buy these IOUs which by the day are getting worthless. It is just monetizing debt in another form. Mr. Obama in emphatic tone said, 'Every dollar of this will be paid by the US'. Fantastic - for the last 25 years, all US Presidents have been saying the same thing and auction bonds. Somewhere in the basement of some establishment in Wall Street, there are reams and reams of such 'promisary notes' saying this will be paid for. For the last 25 years, US has not repaid a single dime of debt back. All that it has done is issued more IOUs [which are actually paid for by the savers in emerging economies]. The speech was very well concerted and put on a good act on television but DJIA simply decided to correct and melt down 200 points. It is just a matter of time that somebody goes beyond the farce of theatrics and show people the real mirror of US. Completely surviving on debt and more debt and getting away with it on the back of a global currency. One more step towards accelerating the economy to stagflation and eventually deflation. Only thing is that this monetization of debt will bring in a whirlwind of hyperinflation once and then go down the drain. The most prudent thing would actually have been to raise interest rates. Although there would be a knee jerk reaction once, that IMHO is the real signal of a country bracing up for real change.
After the dot-com crash, US has not really been producing or growing GDP by REAL Production of goods and services. All that the institutions have done is brought about a complex web of financial engineering that temporarily levitates the economy to the extent of euphoria and mania and then a bubble bursts crash landing all asset prices and more loss of jobs. I can stick my neck out and say this whole nonsense of debt monetization and financial engineering is going to ruin millions of lives yet again. It is even more troublesome because we have Europe joining the bear party as well.
As I have always maintained, the concept of Schengen is excellent for the EU but the concept of Euro for all the countries are not. Apart from Nordic and a few North Continent countries, a lot of countries are just a few notches beyond some of the top notch emerging economies. The adoption of Euro is now going to be a slick fast double whammy. Sooner or later, either ECB will ask all PIIGS countries to leave the EU or a simpler solution - Germany moves out of EU and goes back to DM and Bund [The Bund is still very much a safe fixed income instrument and as on date, commands a better rating than the US T-Bill]. So overnight a coffee that used to cost 50 European Cents equivalent became at least 1 Euro with the adoption of Euro. Regardless of whether the PIIGS countries go out or Germany goes out, the rest of the PIIGS [and similar countries] will end up now getting coffee at at least 2 Euros equivalent for a cup of coffee.
I had mentioned earlier that the markets and activities provide a precursor to what is actually coming and that news reacts to markets and not the other way around except for Black Swan events like war, tsunami etc. One may recollect that a couple of weeks ago I had mentioned about factories getting ready for some good moves to achieve economies of scale on the Swiss-German border and the Swiss getting serious about real business. I had also highlighted that CHF may be a safe haven but the Swiss stock markets not. Even before any of the events/news of US and rest of Europe, the central bank decided to intervene and bring some correction in the value of the CHF. That such a decision came just about 24 hours before a renowned economic magazine voted Switzerland as the most efficient country to do business is surprising?? No because smart money and markets move well before the 'news' is out. Of course with so many industries cropping up around the Swiss-German border that is a good confluence of German enterprise with Swiss precision and discipline meant that the cost of business had to be lowered.
The writing on the wall is very very clear - all PIIGS countries are bound to fail and fail big time. No austerity measure for now will solve any of the problems that have been accumulated over the last 25 years. The interest accrued is so high that it will take at least 10 more years to just get the interest on these debts off the books [and that implies another 10 years of interest accrued further on outstandings]. If one thinks that news is going to impact this, one is mistaken yet again. Smart money is already aware of the risks associated with these countries and the discount rates on bonds and premiums for CDS instruments is a pretty good barometer of what the markets are expecting. The flaw in the practice of many a hedge fund and institution is that by holding Puts, CDS derivatives to hedge risks against the Long Fixed Income instruments is that 'somebody' is going to pay. Whilst the instrument per say is supposed to pay for the risks but when the sovereign itself is out of the way and the central banks have no solvency, the million dollar question is even if I have a PUT [in any format or instrument] WHO pays? In the initial stages of course there will be payouts but in the end, even the most bearish people holding on to bear instruments will end up with useless paper contracts and values will melt out yet again.
Whilst I am very much a fan of Robert Pretcher Jr and did take some time out to read his classic 'Conquer The Crash' book, some of the recommendations don't hold true today [and the new edition of this book has made the necessary amendments and disclaimers] I am personally not a CFA but investing in a bear market fund is not going to solve the problem for sure. First and foremost for the working people in US and Europe, a middle class family depending on wages from a job need to accumulate USD 10,000 / EUR 8,000 equivalent of hard cash available to personal disposal for the rainy day. I am not talking about the bonds from the central government or a fixed deposit in banks that pay interest. Simply hard cash in home lockers to take care of things when the chaos prevails. The entire web of complex financial instruments and derivatives have assumed such maniac proportion of leverage that margin calls will start getting triggered at the drop of a hat and when margin calls come out, all asset classes will witness a sharp sell-off. How many times in the last 12 years have you seen such a fluctuation in the Dow? Up 300-400 points a day and down 300-400 points a day? Such events occur when it is the 'Beginning of An End'; FTSE roared to almost 5400 in the counter-trend rally last week only to drop back almost 200 points at a critical support line for this week. Likewise for DAX and Stoxx. We are looking at a 50% drop in indices within the next 12 to 18 months. There will be one possible maniac flight to highs in commodities but when margin calls are triggered, all the gold, silver, copper, nickel, steel etc etc contracts will be dumped to fulfill the dollar margin obligations.
This time, all stock indices across US and Europe will melt to below the levels we saw in 2008 post Lehman. Houses, Cars and virtually every luxury item that you can think of will be available for piecemeal rates in a year or so from now. The disrespect for cash in reputed mutual funds is disgusting to say the least. Some of the ETFs are so heavily levered and hold less than 3.5% of the Assets Under Management (AUM) in the form of cash. First and foremost, the margin calls and meltdown in indices will blow up values of the Assets. When customers in panic rush to encash their holdings to salvage whatever little they have left, many a fund will be caught napping. I have been a strong proponent of Gold ETFs myself but now it seems like there is some imbalance between the physical gold available in AUM and production that is coming out. If the redemption pressure starts increasing [which will regardless of whether gold corrects from here or makes a counter-trend rally to a new high] the leveraged ETFs will go for a complete toss. Simply put, a lot of leveraged ETFs have much less physical gold with them than what would be expected based on asset size alone. A wrong hypothesis taken by fund managers is that only x proportion of investors will come to redeem the units at any given point of time. When a financial tsunami comes in, all assumptions go for a toss and a lot of ETFs will simply wash off their hands with clauses in the 'Red Herring Prospectus' or equivalent.
More than ever, cash today is king and I always like this statement that Pretcher Jr made in his book 'Conquer The Crash' ;
Q
I would rather be safe and wrong than exposed and wrong'
Of course I also like the use of the term 'blogosfear' by Nadeem Walayat who keeps critizing people/articles from bears like me and keeps on showing the stealth rally on the bourses post 2008. I do agree that the crash of 2008 gave wonderful buying opportunities which is when people actually started selling big time. However, the impact of the impending crisis is far greater than the one in 2008. Every rise is actually a potential short as far as FTSE, DAX, CAC40, Ibex35 are concerned now. On the other hand, at sub-4k levels every dip on DAX is a strong buy and likewise for FTSE. Some esteemed Ellioticians are hinting at 60% and 70% corrections in index values but unfortunately, they are missing out the perspective they posited in the first place. [I have personally flagged this to both Market Oracle and EWI and am awaiting a response from them] Walayat is going on an extreme saying there will be a strong bounceback after a small correction whilst EWI is predicting a near total financial armageddon. Neither of these 2 extremes are anticipated IMHO. However, smart people will start the buying process at levels given above. For Ibex35, I would peg sub5k levels as a good buy and for CAC40, sub-1800 levels.
Will emerging economies like India suffer and continue to mirror this financial gloom and what is the way forward. Will take a look at that in part2
Continued in Part 2
US Infrastructure: Whatever little I know about infrastructure is all about Houses, Office Complexes, Roads and Rail [leaving the service infrastructure like schools and medical care centres just for simplicity]. Housing prices are steadily collapsing despite all the TARP liquidity injections. [A full detail on the anatomy of how bailed banks are profiting from the bailouts is given very well in the ebooks by Nadeem Walayat on Market Oracle]. So given the demand and supply situation of the housing market, the trends clearly show that housing prices are yet to see a bottom in more than 70% of the locations and the rental per unit whilst increasing as of now, will again drop as the next economic slowdown comes again. Roads will probably need some repairs but that is not going to create some great long lasting projects to feed people for life. Rails are in need of some upgradations but it still goes to show that this is not enough. Schools, medical institutions etc are also in need of upgradation and also new creations; fine. However, this entire package still does not spell out in concrete terms, 'How' this plan is going to boost the economy and provide for jobs. Second, it does not spell out 'How will this project be funded'
The answer lies in the past actions; one would be to sell T-Bills which are nothing but IOUs of fiat money. Today the question is who is going to buy these IOUs which by the day are getting worthless. It is just monetizing debt in another form. Mr. Obama in emphatic tone said, 'Every dollar of this will be paid by the US'. Fantastic - for the last 25 years, all US Presidents have been saying the same thing and auction bonds. Somewhere in the basement of some establishment in Wall Street, there are reams and reams of such 'promisary notes' saying this will be paid for. For the last 25 years, US has not repaid a single dime of debt back. All that it has done is issued more IOUs [which are actually paid for by the savers in emerging economies]. The speech was very well concerted and put on a good act on television but DJIA simply decided to correct and melt down 200 points. It is just a matter of time that somebody goes beyond the farce of theatrics and show people the real mirror of US. Completely surviving on debt and more debt and getting away with it on the back of a global currency. One more step towards accelerating the economy to stagflation and eventually deflation. Only thing is that this monetization of debt will bring in a whirlwind of hyperinflation once and then go down the drain. The most prudent thing would actually have been to raise interest rates. Although there would be a knee jerk reaction once, that IMHO is the real signal of a country bracing up for real change.
After the dot-com crash, US has not really been producing or growing GDP by REAL Production of goods and services. All that the institutions have done is brought about a complex web of financial engineering that temporarily levitates the economy to the extent of euphoria and mania and then a bubble bursts crash landing all asset prices and more loss of jobs. I can stick my neck out and say this whole nonsense of debt monetization and financial engineering is going to ruin millions of lives yet again. It is even more troublesome because we have Europe joining the bear party as well.
As I have always maintained, the concept of Schengen is excellent for the EU but the concept of Euro for all the countries are not. Apart from Nordic and a few North Continent countries, a lot of countries are just a few notches beyond some of the top notch emerging economies. The adoption of Euro is now going to be a slick fast double whammy. Sooner or later, either ECB will ask all PIIGS countries to leave the EU or a simpler solution - Germany moves out of EU and goes back to DM and Bund [The Bund is still very much a safe fixed income instrument and as on date, commands a better rating than the US T-Bill]. So overnight a coffee that used to cost 50 European Cents equivalent became at least 1 Euro with the adoption of Euro. Regardless of whether the PIIGS countries go out or Germany goes out, the rest of the PIIGS [and similar countries] will end up now getting coffee at at least 2 Euros equivalent for a cup of coffee.
I had mentioned earlier that the markets and activities provide a precursor to what is actually coming and that news reacts to markets and not the other way around except for Black Swan events like war, tsunami etc. One may recollect that a couple of weeks ago I had mentioned about factories getting ready for some good moves to achieve economies of scale on the Swiss-German border and the Swiss getting serious about real business. I had also highlighted that CHF may be a safe haven but the Swiss stock markets not. Even before any of the events/news of US and rest of Europe, the central bank decided to intervene and bring some correction in the value of the CHF. That such a decision came just about 24 hours before a renowned economic magazine voted Switzerland as the most efficient country to do business is surprising?? No because smart money and markets move well before the 'news' is out. Of course with so many industries cropping up around the Swiss-German border that is a good confluence of German enterprise with Swiss precision and discipline meant that the cost of business had to be lowered.
The writing on the wall is very very clear - all PIIGS countries are bound to fail and fail big time. No austerity measure for now will solve any of the problems that have been accumulated over the last 25 years. The interest accrued is so high that it will take at least 10 more years to just get the interest on these debts off the books [and that implies another 10 years of interest accrued further on outstandings]. If one thinks that news is going to impact this, one is mistaken yet again. Smart money is already aware of the risks associated with these countries and the discount rates on bonds and premiums for CDS instruments is a pretty good barometer of what the markets are expecting. The flaw in the practice of many a hedge fund and institution is that by holding Puts, CDS derivatives to hedge risks against the Long Fixed Income instruments is that 'somebody' is going to pay. Whilst the instrument per say is supposed to pay for the risks but when the sovereign itself is out of the way and the central banks have no solvency, the million dollar question is even if I have a PUT [in any format or instrument] WHO pays? In the initial stages of course there will be payouts but in the end, even the most bearish people holding on to bear instruments will end up with useless paper contracts and values will melt out yet again.
Whilst I am very much a fan of Robert Pretcher Jr and did take some time out to read his classic 'Conquer The Crash' book, some of the recommendations don't hold true today [and the new edition of this book has made the necessary amendments and disclaimers] I am personally not a CFA but investing in a bear market fund is not going to solve the problem for sure. First and foremost for the working people in US and Europe, a middle class family depending on wages from a job need to accumulate USD 10,000 / EUR 8,000 equivalent of hard cash available to personal disposal for the rainy day. I am not talking about the bonds from the central government or a fixed deposit in banks that pay interest. Simply hard cash in home lockers to take care of things when the chaos prevails. The entire web of complex financial instruments and derivatives have assumed such maniac proportion of leverage that margin calls will start getting triggered at the drop of a hat and when margin calls come out, all asset classes will witness a sharp sell-off. How many times in the last 12 years have you seen such a fluctuation in the Dow? Up 300-400 points a day and down 300-400 points a day? Such events occur when it is the 'Beginning of An End'; FTSE roared to almost 5400 in the counter-trend rally last week only to drop back almost 200 points at a critical support line for this week. Likewise for DAX and Stoxx. We are looking at a 50% drop in indices within the next 12 to 18 months. There will be one possible maniac flight to highs in commodities but when margin calls are triggered, all the gold, silver, copper, nickel, steel etc etc contracts will be dumped to fulfill the dollar margin obligations.
This time, all stock indices across US and Europe will melt to below the levels we saw in 2008 post Lehman. Houses, Cars and virtually every luxury item that you can think of will be available for piecemeal rates in a year or so from now. The disrespect for cash in reputed mutual funds is disgusting to say the least. Some of the ETFs are so heavily levered and hold less than 3.5% of the Assets Under Management (AUM) in the form of cash. First and foremost, the margin calls and meltdown in indices will blow up values of the Assets. When customers in panic rush to encash their holdings to salvage whatever little they have left, many a fund will be caught napping. I have been a strong proponent of Gold ETFs myself but now it seems like there is some imbalance between the physical gold available in AUM and production that is coming out. If the redemption pressure starts increasing [which will regardless of whether gold corrects from here or makes a counter-trend rally to a new high] the leveraged ETFs will go for a complete toss. Simply put, a lot of leveraged ETFs have much less physical gold with them than what would be expected based on asset size alone. A wrong hypothesis taken by fund managers is that only x proportion of investors will come to redeem the units at any given point of time. When a financial tsunami comes in, all assumptions go for a toss and a lot of ETFs will simply wash off their hands with clauses in the 'Red Herring Prospectus' or equivalent.
More than ever, cash today is king and I always like this statement that Pretcher Jr made in his book 'Conquer The Crash' ;
Q
I would rather be safe and wrong than exposed and wrong'
Of course I also like the use of the term 'blogosfear' by Nadeem Walayat who keeps critizing people/articles from bears like me and keeps on showing the stealth rally on the bourses post 2008. I do agree that the crash of 2008 gave wonderful buying opportunities which is when people actually started selling big time. However, the impact of the impending crisis is far greater than the one in 2008. Every rise is actually a potential short as far as FTSE, DAX, CAC40, Ibex35 are concerned now. On the other hand, at sub-4k levels every dip on DAX is a strong buy and likewise for FTSE. Some esteemed Ellioticians are hinting at 60% and 70% corrections in index values but unfortunately, they are missing out the perspective they posited in the first place. [I have personally flagged this to both Market Oracle and EWI and am awaiting a response from them] Walayat is going on an extreme saying there will be a strong bounceback after a small correction whilst EWI is predicting a near total financial armageddon. Neither of these 2 extremes are anticipated IMHO. However, smart people will start the buying process at levels given above. For Ibex35, I would peg sub5k levels as a good buy and for CAC40, sub-1800 levels.
Will emerging economies like India suffer and continue to mirror this financial gloom and what is the way forward. Will take a look at that in part2
Continued in Part 2
2 comments:
hello nagraj ji. Xhetani of money control here. wat uve written is quite apt...infact d etf's in US market is highly ovr bought beyond d physical availability....i also adrian salbuchis blog and hes analysis says which is true normal behaviour if all d etfs ask for delivery dn dy dnt have evn quater to avail in delivery...so d price of specially silver shooting has higher probability!!! Wats ur view sir.
Dear Nalin
Silver is a very high beta commodity and is currently taking support at USD 42 levels on CME scale. One can take a risk for short term momentum that may come due to a hyperinflation mania. Short Term target for silver is USD 28 and the downside and USD 15 to 18 in 14 to 18 months. This is my personal opinion and you may choose to discuss with a CFA for appropriate advice
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