Tuesday, November 18, 2008

Will the Current Economic System Survive?

Good Afternoon Everyone!

Before I get to the headline, a few comments.

Man! I feel like I have been watching a yo yo all day long. Good luck to anyone trying to daytrade this market. Stocks ended up around 1.8% on the DOW when all was said and done. The NASDAQ ended the day essentially flat as worries over the consumer and business tech spending continue to pressure prices. Consumers are more worried about paying the gas bill this winter versus buying a new $200 I-phone!

All in all, it was a pretty boring day from a trading perspective because the trading range was very tight despite the volatility. There was little volume except when we moved higher near the close. The volume then dropped back off again in the last few minutes as the trading day ended.

We didn't really learn much today folks. I still expect a breakout to the downside by the end of the week. This wasn't confirmed today so we could ramp higher tomorrow. The markets have become so volatile that its very difficult to predict which way we break on a day to day basis.

I have slowed down my trading activity dramatically as a result of the volatility. I am trying to play this market from a macro perspective and hold my positions long term even if I have to ride out some pain in between. Attempting to scalp money via quick daytrades has become a dangerous business.

My macro thesis still remains to the short side until we test the 2002 lows. I continue to hold SDS, BEARX, and QID short which has worked well over the past few weeks. I am hedged out with UYG(ouch) which has been painful but that's what hedges are for. I also have some GDX calls that are in the money. I have added some TBT(short treasuries) last week as a long term core holding that should work nicely once we start trying to pay for all of these bailouts.

Wahts difficult about holding the inverse ETF's long term is the slippage. The costs on these are high so you lose some gains. However, PUTS make no sense right now because the VIX is too high so its really the only short play you've got unless you dabble in OTM PUTS.

Let me reiterate that I remain aggresively short in my trading account which is a small piece of my portfolio. The positions above are not my part of my core retirement portfolio.

My core holdings are mainly in treasuries and bonds with BEARX as a hedge(15%). I also have some long mutual funds. Its all about diversification and preservation of income folks when it comes to your savings!

In long term secular bear markets, I think its always best to stay mainly in fixed income and hedge yourself with long positions. Owning short shares in your retirement is up to you and your risk tolerance.

If you find the volatility of shorting keeps you up at night, keep it in fixed income instead. I would suggest that if you hedge short in your retirement, use a mutual fund like BEARX. They tend to be much less volatile, and they pay a nice dividend of around 3% at the end of the year.

You also need to realize that these funds are not long term holds like long funds. You need to switch out of them when the economy turns. For example, BEARX returned 140% over a 2 year period during the tech wreck in 2000/2001. However, it dramatically underperformed for years when the housing bull market started.

When the bull comes back(that won't be anytime soon!), you need to make big changes in your retirement portfolio. You simply reverse your holdings, you go long and hedge yourself with some fixed income(this percentage varies depending on your age). You also need to get out of your short funds if you decide to dabble short.

OK , lets get back to why I am still short from a trading perspective. I want to thank one of my readers from Canada that brought the recent GEAB report to my attention. Thanks Alex!

I put the above article in the MUST READ category folks! This is a well respected organization from Europe, and they have been pretty spot on when it comes to the economy and this financial crisis. I will go over it after I pull a graph from the article.

Lets take a look at history and see how this major correction ranks among the other great bear markets from the 1900's in terms of 1st year percentage drop:

Final Take:

How about that for an eye opener? We're #1! We're #1! Ooops... This isn't something to celebrate is it. As you can see, the 1973/74 correction that your parents talk about pales in comparison to the monster correction we have seen this year. Not even the mighty 1929 crash can match the destruction seen in 2008.

The GEAB is basically calling for a total economic collapse by summer 2009 if this financial crisis isn't dealt with from a global perspective. The GEAB basically believes the whole US dollar based economy must be eliminated and completely overhauled or its "lights out" for the economic system. I have been warning that something like a new world currency or an alternative to the dollar might be coming as the animosity grows towards the USA for creating this disaster.

What I didn't realize is that the system could potentially collapse if we "stay the course". I also am startled by their timeline. 2009 is next year folks! I have always said that when this debt bubble does collapse, its going to be like the "shock and awe" that was seen by the Iraq Army when we stormed in there after 9/11.

When this debt bubble blows, its going to be terrifyingly fast and devastating to watch. Here are some predictions from the report:

"Without a complete overhaul of the system inherited from 1944 by summer 2009, the failing of the current system and that of the United States at the center, will lead the whole planet to an unprecedented economic, social, political and strategic instability, and more specifically to a breakdown of the global monetary system by summer 2009. In light of the technocratic jargon and calendar of the declaration released after this first G20-meeting (totally disconnected from the speed and scope of the unfolding crisis (1)), it is more than likely that the disaster will have to happen for the fundamental problems to be seriously addressed and for the beginning of a reply to be initiated.

Four key-factors are now pushing the Bretton Woods II (2) system to collapse in the course of the year 2009:

• Fast weakening of the central players: USA, UK

• Three visions of the future of global governance will be dividing world’s largest players (United-States, Eurozone, China, Japan, Russia, Brazil) by spring 2009

• Unbridled speeding-up of the last decade’s (de-)stabilizing processes • Increasing number of more and more violent backlashes.

The agitation that has seized global leaders since the end of September 2008 indicates that panic has struck at the highest level. Worldwide political leaders have now understood that the house is on fire. But they have not yet perceived something obvious: that the very structure of the building is involved. Improving fire-regulations or reorganizing emergency services will not be sufficient. To use a strong symbolic image, the World Trade Center’s twin towers did not collapse because firemen were late or because water was missing in the automatic fire-system, they collapsed because their structure was not meant to support the shock of two airliners hitting them in just a few minutes.

Today’s global monetary system is in a similar situation: the twin-towers are the Bretton Woods system, and the airliners are called « subprime crisis », « banking failures », « economic recession », « Very Great US Depression », « US deficits », … a whole squadron."

Their Ideas to resolve this crisis:

"Today’s leaders, who all belong to the collapsing world (including Barak Obama (3)), cannot possibly imagine how to solve the problem, just like central bankers in 2006/2007 could not possibly imagine the scope the unfolding crisis could reach (4). It is their world which is disappearing under their eyes, their beliefs and their illusions (sometimes similar) (5). According to our team, a 20 percent renewal of worldwide leaders is required to begin to see sustainable solutions (6) appear. This is indeed, according to LEAP/E2020, the « critical mass » needed to permit any fundamental change of perspective in a complex not very hierarchical human group. Today we are still far from reaching this critical mass: in order to contribute to finding solutions to the crisis, those new leaders must accede power in full awareness of the crisis’ specific nature.

According to LEAP/E2020, if global leaders fail to realize that in the next three months and to take actions in the next six months, as explained in GEAB N°28, the US debt will « implode » by summer 2009 under the shape of the country’s defaulting or the Dollar’s dramatic devaluation. This implosion will follow closely a number of similar episodes affecting less central countries (see GEAB N°28), including the United Kingdom whose already huge debt is ballooning at the same pace as Washington’s (7). In the same way as the US Federal Reserve saw, month after month, its « Primary Dealers » (8) being swept away by the crisis before it was itself confronted to a real problem of capitalization and therefore survival, the United States in the coming year will witness the implosion of all countries too-closely integrated to their economy and finance, and of their allies financially too-dependent on them (9)."

Bottom Line:

An interesting read isn't it? I really don't know what to add here folks. I pretty much agree with all of it. As you can see by the chart above, stocks have fallen faster at the beginning of this downturn than they did in 1929. To think that "its different this time" is classic "bubble thinking". Its like hearing a realtor tell you "housing always goes up!".

Throughout time we have consistently made the same mistakes over and over again. This debt bubble was the biggest one of them all. It was created over a span of about 25 years, and it was done on the the grandest of all scales! Never in the history of the markets have we ever seen this dangerous combination of fraud and lack of regulation. As a result, the correction should be worse than anything seen in the 19th century.

Its time to pay for the consequences of our greed.. The Great Depression was bad but at least our economic system stayed in tact albeit with a few tweaks.

It appears we may not be so lucky this time. Wake up Washington! Time is running out.


Growler said...


Jeff said...


Right there with you.

Paulson and Bernanke looked lost during the hearings today. You can tell they don't have any answers to this crisis.

I don't think anyone does.

Jeff said...


Hombuilder confidence hit an all time low of 9 today. A reading less than 50 means builders consider conditions to be poor.

This is unbelieveable. Being a 9 is great if you are a hot model. unfortunately the builders use a different scale:


flipdippy said...

If BW2 collapses, we'll just have BW3.

The US issues debt in its own currency, which is the world's reserve currency.

The rest of the world wants to get paid back for all the treasuries they've purchased. The US will continue to issue debt and try to increase our monetary supply.

It's impossible the economic system collapses in 6 months. Impossible.

Anonymous said...

I keep feeling like the discussion about what to do with our troops in Iraq and Afghanistan will essentially be a moot point within the year. Wonder what will be done with them when all this goes down.

Jeff said...


Good points

Nothing with this economy is impossible in my view. things are happening at lightning speed.

The problem we have with the US dollar is its a currency that should be collapsing not strengthening because we are spending money like its water and our interest rates are practically at zero due to a weak economy.

Because the rest of world is worse off than we are the US dollar strengthening. The problem is this is not a healthy move. The dollar is strengthening for the wrong reasons. Its an artificial move.

In my view, traders will eventually run from the dollar because we are taking huge risks in our attempts to stave off deflation.

If this happens and all of the worlds asets are in dollars, the economic system risks a collapse.

The dollar will not continue to be propped up for no fundemental reason.

When it breaks south(and it will) like its supposed to, the scenario of a systemic collapse could happpen very quickly because the worlds reserves drop dramatically.

Jeff said...


I know

In my opinion we can't afford to keep all of those troops over there.

My guess is Obama will scale the number of troops abroad back dramatically. It will be interesting to see how this plays out.

Jeff said...

By the way

A little market update.

Things look terrible today folks. Currencies are all over the place.

Sold my TBT to get out of the way of this massive flight into treasuries.

It appears the bond market is pricing in a deflationary depression. There is a massive flight risk into treasuries. Treasuries are in terrible shape right now but the equities market looks worse.

Everyone is piling into whatever safety they can find.

The stock market looks very sick right now. Be very careful. DOW and NASDAQ are down 2.5% and 3.5% respectively.

Minton Mckarkquey said...

God, Jeff, this is looking ugly. I'm starting the think these Doomsday scenarios are becoming a distinct possibility, especially after watching the US Comptroller's campaign about how broke we all are (http://www.youtube.com/watch?v=OS2fI2p9iVs&feature=related).

*Sigh* I'm reminded of the movie Airplane, when Lloyd Bridges' over-drinking over-smoking character says "It's looks like I picked the wrong day to quit amphetamines."

Jeff said...



This is getting scary. I love Airplane. What a classic.

Today was all about the credit markets. Those "AAA" spreads are blowing out. We may be on the verge of seeing a major event in the bond market.

I will have an update up tonight. What an unbelievable day.

flipdippy said...


I think we agree on market direction, I just don't see whatever the end result of this problem being happening overnight.

Agree totally on the dollar. Once the dollar rally gets closer to a peak I'm going to move back into some sort of foreign held currency basket in case there's a capital flight, or in case capital controls get instituted in the US.

I don't understand why the bond markets are pricing in a deflationary depression. There's only been one of those anywhere in modern history, and that was in the US in the 30s. Every other nation that experienced a deflationary period had it followed by a period of rapid or hyper inflation. That's where the US will want to go, I think, to shrink the debt we have.

I think we're getting close to the bottom (for now) on the markets. Tempted to buy back in and ride a short euphoric Obama bounce.

Jeff said...


We are right on the same page.

I am working up a post on what happened in the bond market today. It was more government intervention.

There is a big rumor that the FED was buying the 10-year today. If thats true we are in deep s**t because it can't be sustained.

I think an Obama bounce is coming as well but I can't buy into it the way things are going.

I totally agree we have raging inflation coming out of this.

Anonymous said...

There is a big rumor that the FED was buying the 10-year today.

OMG!!! Shit, I'm get scared again like at the beginning of the year. This is all sheer madness.

Jeff said...


Me too.

I have that Bear Stearns like feeling again that the financial world is going to come crashing down!