Merrill's Rosenberg: Deflation is Here!

Good Afternoon Folks

A few comments before I go watch some college football! Here is Merrill Lynch's David Rosenberg's most recent update. Sorry, no link here folks. David's major concern is deflation next year. I am a big fan of this guy as you all well know.

Take a look:

"The CPI and deflation

Prices dropped in October. More to come.

Headline CPI dropped by 1% for October, the largest monthly decline in the 60-year history of the series, and core CPI declined by 0.1%, the first decline since 1982. We expect the November data to be even softer. The numbers suggest that businesses are trying to counter a massive drop-off in demand by cutting prices, and the price cuts they have taken so far are not doing the trick. With unemployment increasing, price competition will only intensify. That suggests that there is a genuine risk that the US economy could fall into a corrosive deflationary phase, one in which inflation turns negative while aggregate demand is weak.

CPI likely to deflate year-over-year in 2009

This is a trend in the making, in our judgment. Our models indicate that, by the second quarter of next year, there will be sequential declines in the CPI, and the index will be deflating on a year-on-year basis for the first time in five decades. The last time that occurred, the funds rate was 1% and the 10-year Treasury mote yield was hovering around 2-1/2%.

Interaction of aggregate supply & demand drives inflation

From a top-down perspective, what drives inflation are the shapes and the interaction of two different curves – the economy’s aggregate supply curve and the aggregate demand curve. The movements of these curves indicate where the “output gap” is at a particular time – the difference between the level at which the economy is actually operating and the level at which it would be operating if it were running flat-out at full employment.

In other words, the gap measures the degree of slack in the labor and product markets. According to our models, the output gap, currently at 2%, is right where it was the last time the Federal Reserve had cut the funds rate to 1% and when the yield on the 10-year note was hovering near 3.5%. That was during the summer of 2003. The difference, of course, is that back then the housing bull market was in full swing, the credit expansion was about to turn parabolic, and we were on the verge of a five-year upswing in profits, commodities, equity valuations,and the economy. In the year after the mid-2003 cut in the funds rate to 1%, real GDP expanded 5% and that output gap was sliced in half.

Output gap to widen to a never-before-seen level

Barring a further large dose of monetary easing and major fiscal stimulus, our models predict that the output gap is going to widen to 8% by the end of 2009. That’s a magnitude that we have not entered before. The extent to which the inevitable deflation will be sustained beyond 2010 is likely to hinge critically on the government’s ability to bolster aggregate demand growth. We sincerely wish the Fed and our fiscal policymakers good luck in dealing with this state of affairs. Deflation is a pernicious development insofar as it raises the real cost of debt and debt-service and, as a result, frustrates the private sector’s moves toward balance sheet improvement"

Bottom Line:

Mr. Rosenberg is basically telling you that he expects to see deflation at an unprecedented scale. Notice in the chart above, the last time we saw prices on assets drop anywhere near this far was in the early 80's when interest rates well over double digits as we fought the wicked inflation that haunted us in the 1970's.

The fact that this oncoming deflationary period is expected to surpass the early 80's deflation due to high interest rates is a frightening proposition. This basically tells me we are pretty screwed unless Obama pulls a rabbit out of his hat.

This does not bode well for housing prices or any other assets prices over the oncoming year. There is still no rush to go and buy a house right now folks! As you can see, Rosenberg expects a total freefall on assets in 2009 from a pricing perspective. Go read about Japan's deflation if you want to see how devastating hte effects of deflation can be. You can take a look at an old post of mine to see what it did to Japan's stock market.

A few reads:

A great commentary here from Bloomberg's Jonathan Weil. Why even get involved in this rigged game on Wall St?

3 more bank failures announced Friday

Until next time!

J

Market Rallies back on Geithner Nomination

Hello All!

Its a sad day when it takes an Obama nomination for Sec'y of Treasury to rally the markets. That's exactly what happened today folks. The news continues to be grim but it didn't matter today. You know those bulls! They love to rally the market on hope!

I said yesterday that we were due for a bounce but geez!. The fact that the volatility is this high is frightening folks. The credit and stock markets are both extremely unstable. The move in gold today in my opinion is a result of the instability of the markets. I think many are tired of this roller coaster, and are loking to find an alternative investment. Gold is a logical choice. Check out the big move today.

There was more gloom and doom today from a research standpoint.

The Goldman Sachs economic report was interesting today:

"(Reuters) – Goldman Sachs on Friday lowered its U.S. growth forecast citing a fiscal policy stagnation, record increase in unemployment and a sharp decline in profits, deepening and extending the expected recession.

Goldman said it now expects U.S. GDP to fall 5 percent in the current quarter, with unemployment rate reaching 9 percent in the fourth quarter of 2009.

It also forecast the 10-year yield to fall to 2.75 percent by the end of the first quarter of 2009, as compared to previously estimated 3.5 percent.

"The combination of weaker real activity and slower inflation means that profits of U.S. companies will fall even more sharply than we had previously expected," Goldman said in a note to clients.

Goldman now sees economic profits falling 25 percent in 2009 on an annual average basis, the biggest drop since 1938. It had earlier expected a fall of 20 percent."

Quick Take:

Isn't that just Rosy?

I am amazed at how the market can rally 6% when research reports like this are released. Whats even more ridiculous about this rally is Geithner took all kinds of heat for letting Lehman fail. He might not be the hero that everyone on Wall St. hopes that he is.

Obama's appointments so far hardly represent "change". In fact its appearing more and more that he represents "more of the same". Geithner is good buddies with Paulson and is just another pigmen from Wall St. Obama could have really sent a strong message by going out on a a limb and given the spot to Volker for a year or two in an effort to clean things up. I realize the guy is a dinosaur, but he knows how to clean up messes! He doesn't need to serve a full term in order to do so.

Hillary Clinton appears to be a lock for Secretary of State. Change? HAH! what a joke. I thought the Clinton era was coming to an end? I guess not.

Remember folks, Obama is being pumped up to be the savior of the world. He is supposed to be the next messiah!

The reality here is he is a one term senator that is being thrown into the biggest economic crisis in history. There is no way he will be able to fulfill these unrealistic expectations. Obama is in way over his head, and this economic collapse will take him down and probably define his legacy. None of this will be his fault of course. In fact, he seems to be a pretty normal, nice, moderate guy.

Lets hope he is a fast learner and is able to get his hands around this. Good luck Obama! Your going to need it! I do seriously wish him the best. We need a great leader badly to get us through this unfortunate time in history. Unfortunately IMO, its too late to clean this mess up, and the market is going to fall like a rock when they realize this.

Bottom Line:

There is not much else to report today. There was no good news or catalyst for the rally. It will fail like all of the others. The question here is this: Is this the beginning of the Obama rally or just another failed pump. I am on the fence here as the holidays approach. Its wait and see time for me and new trades.

Attempting to short this move could be very profitable, but its very risky.

There are potential shoe drops everywhere that could move the market south. Citigroup seems to be hanging on by a thread and could be dissolved over the weekend:

"Nov. 21 (Bloomberg) -- Citigroup Inc. will probably get rescued by the U.S. government after a crisis in confidence erased half its stock-market value in three days, investors and analysts said.

Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got U.S. support this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September."

If Citi fails, its probably good for 1000-1500 drop in the markets. My guess is the Treasury will force a merger here or backstop them. this is in the "too big to fail" category according to the Fed.

I am going to focus more on gold and the miners right now. I own some GDX as you know, and I am encouraged by the breakout move in gold today. I get the feeling that investors are tired of the whipsaws seen daily in the markets. They want stability and safety as evidenced by the big move into treasuries this week.

I think gold may be the perfect alternative to this roller coaster market that's starting to make everyone nauseated.

Stay Tuned!

Peter Schiff and the Dollar

Be careful out there today folks.

Word is there is a lot of lot of mutual fund selling thats going to occur today. Many stocks have dropped below $5 during this massive selloff. This in turn is triffering another round of selling by mutual funds because many aren't allowed to own stocks under $5.

The bounce has reversed this morning, and the mutual fund selling could provide us with another ugly day today.

I will be back with a recap later. In the meantime, check out Peter Schiff. One of my thoughts lately circles around the dollar. Peter touches on this, and I also believe the move in the dollar is way overdone. There is no fundemental reason for the dollar soaring like this.

The one theory as to why the dollar is strengthening is because the world is more screwed than we are so money will continue to flow over here.

This is hardly a strong thesis. Fundementally the dollar should be severely weakening based on our ridiculous bailout spending, our weakening economy, and interest rates that are hovering near zero. I am starting to believe the speculators have piled into the dollar trade just like they did in oil. As we have seen all year, when the speculators pile in, the trade usually ends up turning into a disaster. Oil/housing anyone?

The play here would be to buy some metals. You buy them based on a weakening dollar versus any fundementals in gold or silver.

Good luck today!

Treasury Yields Plummet to 50 Year Lows as Depression Fears Deepen

Good Evening Folks!

I must admit that I found myself very depressed today as I watched the market unravel right before my very eyes. The markets fell another whopping 5-6% today as investors in droves continued to run away from the stock market and pile into treasuries. Short term treasuries are now offering yields of less than 1% folks.

Take a look at this Reuters article on the flocking to treasuries:

"* Treasury bond prices soar on depression fears

* Ten-year yield hits 50 year low, 2-year yield record low

* Thirty-year yield nears 3.5 percent (Updates prices, adds fresh quotes, changes byline)

By John Parry

NEW YORK, Nov 20 (Reuters) - U.S. Treasury debt prices raced higher on Thursday, sending benchmark 10-year yields down to a five-decade low, as recession fears pummeled stock markets and intensified a rush to the safety of bonds and cash.

The fall of longer-dated note and bond yields to five decade lows marked a new extreme of risk aversion among investors, many of whom have not experienced such tumultuous financial market turmoil in their lifetimes. Many analysts are now starting to worry there is at least an outside chance of a depression, not just a recession.

"You have fear in the market that you haven't had since the 1930s," said Bryan Taylor, chief economist with Global Financial Data in Los Angeles.

The 10-year note's price rose nearly three full points, pushing its yield down to 3.03 percent, the lowest level since 1958 according to Reuters data and Global Financial Data.

The 30-year Treasury bond surged more than three points in price with its yield dropping to 3.61 percent, a level not seen in 50 years, according to Global Financial Data.

The stampede into lower-risk assets from stocks pushed ultra-short bill rates toward zero percent. It also drove the two-year Treasury note yield to below the Federal Reserve's 1.00 percent benchmark target rate for overnight funds, suggesting bond investors are betting the central bank will keep interest rates very low for a sustained period."

Quick Take:

Unprecedented times folks. You know investors are scared when they are willing to make almost zero interest on their money in return for the safety of treasuries. I have seen nothing like this in my investment career. I am pretty much speechless at this point. We are witnessing fear not seen since the 1930's.

So how did we get here?

My Take:

Its pretty simple folks. We borrowed too much. As you can see above, our private debt versus GDP is higher than at any time in our history. This debt bubble dwarfs the 1929 debt bubble by about 30%.

The euphoria of the housing bubble took lending to a new level. Lending standards deteriorated to the point where anyone with a pulse could get a loan. The lack of regulation then created an environment where fraud was able to thrive at an unprecedented scale.

This throwing of money out of helicopters built up our debt load to the point where it simply cannot be paid back. As a result, consumers are defaulting right and left on everything from mortgages to credit cards. The banks are now all insolvent.

The price action on financials has been terrifying to watch. Once Paulson said the TARP was not going to be used on buying this debt, every bank is beginning to be priced like its worthless. I mean look at Goldman Sachs stock price this week. Gee, do you think this might be because they have $73 billion in level 3 assets that Paulson has just announced that he is not buying? This stock should be a zero folks. So should almost every other bank in the country.

What Paulson is slowly realizing is he doesn't have the coin to bailout the whole economy. Look at the char above. We have borrowed 3x our GDP! That $350 billion left in the TARP is a drop in the pan versus what is needed to get us out of this mess.

I am starting to believe that we could possibly see a scenario where the DOW eventually drops down into the 3-4000k area. The NASDAQ fell 80% in tech bubble crash so why can't this market do the same? This crisis is much worse than the tech bubble.

Everyone thinks this just can't possibly happen because our economy is much more sophistacted and innovative now. I say why not? It appears our financial innovation was nothing but a mirage! This debt bubble is bigger than 1929 where we ended up dropping 90% from the highs so to expect that its different this time sounds pretty stupid.

I would like to think that better policymaking prevents us from this type of drop, but I gotta tell you folks: I am starting to lose faith in this thinking as I watch the Fed and Treasury run around in a complete panic. They seem to be rewriting the rules as they go. The TARP in one month has completely morphed from what is was supposed to originally supposed to be. It looks like it had a sex change its so different! In my eyes it appears these two clowns seem to be just just throwing a bunch of spaghetti at the wall and hoping something sticks and works

Lets just hope we avoid a repeat of 1929.

Bottom Line:

The sad reality here is the government is slowly realizing they need to start saying "no" to failed companies and let them go BK. They must begin to start spending their money more prudently and pick and choose their battles because time and money are running out. Notice how there was no Big 3 auto bailout today? I predict you are going to see a string of bank failures and mergers over the coming months because as smaller banks are shunned from access to the TARP.

From a trading perspective I lightened up on some shorts. I sold my SDS. I have no idea how long this selloff is going to continue but I do know it can't hurt to take some profits! We are in uncharted territory from a trading perspective IMO. I really can't tell you where we go from here with any confidence. This selloff has been breathtaking. Keep your positions small and hope for the best. This country needs it.

Dell came out with some decent earnings so perhaps we get a little rally tomorrow. At this point, I am ready to see some green folks. I am genuinely fearful that we are heading into a Great Depression. If the credit market are beginning to price a dpresion in than you need to as well. I have always said that the smartest traders in the world are in the credit markets.

This means you must begin to prepare yourself for a severe downturn. I suggest that you pay off as much of your debts as possible, and increase your savings dramatically. Keep some cash on hand at home. It doesn't have to be your life savings. Just make sure its enough to get you through a month or so. Any big expenditures should be put off if they are not necessary. That plasma screen TV will be there next year!

If your employer is downsizing and you feel vulnerable, its time to polish up your resume. Be proactive and prepare to hunker down. This is going to be the worst economy that you will ever live through.

The credit markets have acted like they have seen a ghost the last couple of days. If they are nervous, you should be too.

Stay Tuned

The Credit Markets Rule the Day

Good Evening Everyone!

All I can say is wow what a day. The stock market was crushed today as the DOW and NASDAQ both plunged almost 6% on continuing weak economic news combined with fears in the credit markets.

Lets get right into it folks. I have been warning that the soaring AAA spreads would eventually catch the eyes of equity traders and create a selloff in the stock market. It looks like today was the day. Take a look at the AAA spreads:

Quick Take:

Spreads are soaring higher than housing prices did from 2003-2005! Folks, spreads have almost doubled from a few weeks ago. The literally gone parabolic the last few days. Hank's insistence of using the TARP to inject capital into the banks versus buying AAA paper is absolutely killing the value of this paper.

This in turn is killing the banks because all of them own gobs of these crap sandwhiches. This explains why Goldman, Citi, and Bank of America are all tanking on a daily basis. If the government doesn't step up and buy this paper, there is a chance that no one will if its not government guaranteed. The non guaranteed AAA paper could very well possibly be worth pennies on the dollar when its all said and done!

The government guaranteed AAA debt is also losing value because investors are starting to question if the government can make good on the promise of backing this debt. This is a flat out disaster folks. If this paper is worthless, our banks that hold this stuff are toast. I guarantee you that one of the big banks like Citi doesn't make it through this downturn when this is all said and done. This is a flat out crisis folks. I don't see any other answer other than to mark all of it to market, creat transparency, and suffer the consequences.

This is a better option than the USA government defaulting on itself in an attempt to prop up this AAA garbage. This is an absolute mess!

Was it investor's or the Fed that flocked into treasuries today?

I am sure it was a lot of both as the markets tanked. The Fed rumor was floated on CNBC(video). If this is true look out! The Fed may be attempting to buy the 10-year in a desperate attempt to lower mortgage rates and prop up the housing sector. Interventions like this are how disasters are created folks.

I mean think about it. How has government intervention been working for us so far? Umm lets see the TARP? Housing Bailout? Bear Stearns? AIG? Ban on short selling? Discount window? I could go on and on but the answer is the same to all of them. None of the interventions have worked. In fact its often made things worse! The fact that they are now potentially interfering with the credit markets is extremely dangerous and could trigger a bond dislocation.

The markets continue to fall despite massive intervention. The scary thing about the Fed buying treasuries is they can only do this for so long. When the music stops and they stop buying the treasuries is when you could see a massive bond dislocation. Yields would then reverse and shoot to the moon! Double bigit interest rates could happen in a matter of weeks.

When you see the historical charts on long term bonds, it does appear that something fishy is going on:

Bottom Line:

We are on the brink of some type of watershed moment in the markets. It appears the Fed is out of bullets as this debt bubble continues to collapse.

A drop in bonds that you can seen above tells you that the credit markets are pricing in a deflationary depression type scenario. The only other way long term bonds drop like this is Fed intervention.

Either scenario are major negatives for the stock market IMO. Keep a close eye on the credit markets folks. If these AAA binds blow it could have devastating consequences for all of the markets.

I have no idea where this all takes us. I am afraid we are heading rapidly into the abyss. Lets all pray we find a solution that gets us out of all this. I am becoming less hopefull by the day.

We are rapidly losing control of this collapse, and the markets may decide to hit the panic button at any moment. I have a feeling that we could see a capitulation in stocks within the next week. I stayed short heading into the close. Santa landing on the trading floor tomorrow couldn't create a bounce in my view.

Technically we closed at 806 on the S&P. This is below the 818 low. The one hope the market have to move higher is we technically haven't strongly broke the lows. The next stop down is the 760's on the S&P which are the 2002 lows. If that doesn't hold then hold onto your hat.

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.

Its going to be a TARP Christmas

Santa is going to have some serious competition this holiday season.

December is here, and it won't just be the children that are making up their Christmas lists and checking them twice. CEO's around the world will be doing the same except they aren't praying to see a chubby guy with a white beard come down their chimney with a bag of goodies.

The CEO's have a different Santa. His name is St. Hank and he uses a bag of money called the TARP to spread joy versus the bag of toys that Santa uses. He is a bald little fellow that used to live in New York City.

Our pigmen's Christmas wishes don't involve a stocking or a gift under a Christmas tree. They would prefer something a little different: A check. These pigmen would have a problem if they were hoping Santa would come because all of these boys and girls have been naughty and not nice. Under Santa's rules, this means you get a lump of coal in your stocking.

However, St. Hank's rules are different given his history of giving. He tends to reward reckless/greedy(naughty) behaviour versus prudent and responsible(nice) behaviour.

There are many CEO's who have made up their lists for St. Hank:

The Mayor of San Jose would love a $14 billion check from St. Hank. There are dozens of others who are hoping for the same. The autos and bond insurers are the ones that first come to mind. Many got their presents early this year. The Hartford, American Express, and the big banks all have been rewarded handsomely for being greedy by St. Hank.

However, St, Hanks Christmas may be over.

St. Hanks Problem

St. Hank is running out of money rapidly, and Bloomberg reported today that the rest of the TARP will be held until Obama gets into office:

"Nov. 17 (Bloomberg) -- The Bush administration told congressional aides it won't ask lawmakers to release $350 billion remaining as part of the $700 billion U.S. financial- rescue package, people familiar with the matter said.

The administration of President George W. Bush ends in less than 10 weeks, and a delay in requesting the cash would leave it to President-elect Barack Obama to tap remaining cash in the bailout money.

The Treasury Department has committed $290 billion, or about 83 percent of the total allocated so far in a program Congress enacted last month to inject capital into a wide spectrum of banks and American International Group Inc. The U.S. invested $125 billion in nine major banks, including Citigroup Inc. and Wells Fargo & Co. and plans to buy an additional $125 billion in preferred shares of smaller lenders."

Final Take:

It looks like St. Nicks wallet is about to run dry for awhile. Folks I make fun of the TARP because its turning into a complete joke. When mayors of cities are asking for $14 billion from the TARP, you know we've got big problems.

The most comical reality of the TARP is its size relative to how big our problems are. I wouldn't be surprised if the TARP has a Napolean complex. This is a $350 billion answer to a multi trillion dollar nightmare when its all said and done. Its becoming more and more obvious by the day that we simply don't have enough money to prevent the collapse of the largest debt bubble in history.

The use of the TARP is constantly changing as the economic "boat" continues to spring new leaks. I have this image in my brain of Hank and Ben running around the deck of this boat pulling their hair out(whats left of it) as they attempt to plug the leaks in order to keep the ship afloat.

Its just a matter of time until they eventually will be forced to "walk away" like a distressed homeowner does. At some point Ben will pull a Roberto Duran and declare "No Mas". Remember folks, when you gotta a $20 bill in your wallet and your kids all ask for $30 at once someone has to be told "no".

The same thing has to happen here(I hope). If it doesn't, we will end up defaulting just like every other country that attempts to spend itself out of a crisis. Need I name the list: Russia 1998, and Argentina to name a few.

You would like to think that we would be intelligent and sophisticated enough to say "no" to our corporate children and take the pain that's needed in order to work ourselves out of this mess. I must admit, as I watch bailout after bailout, I am starting to think we may be stupid enough to become a giant "enabler" to all.

The government must realize that this "bailout" mentality does nothing but fuel more bailout requests. We all know what happens to a rich person who can't say "no" when someone asks them for money. They end up broke. Ask Mike Tyson or the majority of lottery winners how this worked out for them.

The question now becomes is when will the government draw the line and start saying "no". Senator Shelby thinks it should start with the big three auto companies. I doubt it because Obama got a lot of support from unions in the election up in the Midwest. However, I don't rule it out.

Whenever this moment comes, it will be a watershed moment for the markets. The market will immediately realize that every company is on its own. The weak companies will then be murdered by investors as they realize they cannot survive a brutal recession.

This debt bubble will collapse folks. You can count on it. The government will do everything in its power to prevent it, but I don't think they will destroy themselves in the process when they realize they can't stop it.

Bottom Line:

Nothing has changed guys and gals. We had another red day in the markets. We are again threatening the 2002 lows. Worries over a deep recession are beginning to deepen. Buyers will not come back to the market in any volume until they have a better feel for how bad this recession is going to be.

I expect the lows to be tested once again this week. The light volume tells you there is no real conviction from the bulls or the bears. I think the market is in "wait and see" mode. We get inflation numbers tomorrow. The inflation pressures have really weakened, and I would guess the CPI number should reflect this. However, the market is now worried about deflation so if inflation falls off a cliff, the market might actually react negatively. Be careful if you trade the CPI tomorrow.

As for myself, I am in wait and see mode as well. My trading positions haven't changed and I see no catalyst to take the market significantly higher. I also am cautious as we near the lows and come up on the holiday season. This has usually been a generally positive time in the markets.

Lets see what happens as we near the lows again, I need to see more conviction in one direction or the other in order to place some more trades. I will lighten up on some shorts if we get down around 8000. I am still have my eye on DIG. Oil looks to be settling around here.

Stay tuned!

What would an Economic Collapse Look Like?

Good Afternoon Folks!

I hope everyone is having a great weekend. Many us are beginning to ask ourselves this question. As each day passes, the chances that this whole economy collapses becomes more and more of a distinct possibility.

So what would an economic collapse look like?

I wanted to share a great speech from a well respected author named Dmitry Orloff. What gives Dmitry so much credibility is he knows what an economic collapse looks like because he lived through one after witnessing the USSR collapse in the 80's and 90's.

I think its time that all of us start to ponder the possibility that this could happen here.

I have been recently horrified watching the government spend trillions of dollars bailing out everyone under the sun. We can't possibly have the money to pay back this debt and eventually the world will smarten up and come to the same realization and stop buying our treasuries.

Dmitry discusses this topic and offers many tips on what an economic collapse looks like and offers some great ideas on how to survive one. The link below is from a speech that he gave in November up in Michigan.

Here is the link to Dmitry

Enjoy!