Signs and portents

Over at Financial Sense University, Jim Willie paints a frightening picture. He claims that the US Federal Reserve has been secretly giving dollars to foreigners to buy US Treasury Certificates, so (temporarily) supporting US bonds and the dollar. Meanwhile, big banks are waiting for smaller banks to suffers losses on commercial loans, at which point they will gobble up their smaller competitors. But the big banks are insolvent, so rather than a healing juncture, it'll be a vampire puncture.

Studying the US Dollar Index, Willie uses a measure that Karl Denninger has previously cited, namely, a comparison of two trends: the 20-week moving average with the 50-week moving average. When the first crosses the second, the second will eventually follow - in this case, downwards.

In my previous post, I referred to signs and portents. This is because when big things are happening, the fog of lies thickens, so we have to look for betraying details and use our intuitions. Art is often the canary in the mine - you hear the coming conflict in the discords of Stravinsky's 1910 "the Rite of Spring". The disturbed children that I teach have recently been exploring zombies. Some also play computer games at home, that involve stabbing opponents in the eyes or genitals. One child's graffiti tag is JABZ.

Doodling, they draw pistols, rifles, knives, swords; but still read Postman Pat and Spongebob Squarepants. Gossiping, they talk of their mother's vibrator, their father's merkin, but (at age 11) don't quite understand and are looking forward to learning the facts about sex next week, which our curriculum now requires me to deliver. They come in shadow-eyed from gaming, but also from (in one case) accompanying their father late at night as he hunts down and savagely beats people who tied up and soaked with petrol an uncle suspected of stealing a motorbike. Where are the police? you may ask; the father is an ex-policeman. The Monarch's writ does not run where our underclass have to live; to have normal social inhibitions would be dangerous in such an environment.

Some may accuse me of moral panic; but I didn't grow up with the currently prevailing sense of moral ambiguity, despair and social collapse. Are we breeding a nation of future child guerrilla-band soldiers? And how tragic, how culpable, that the entertainment industry is playing its part in this; and that the Government hopes to shore up its vote by perpetuating the financial dependence of its claimants.

But it won't happen to us, will it? "Wat geht dat mik an?" as the mediaeval Germans would say: "What's it got to do with me?" Years ago, my Prussian grandmother described Der Flucht, the flight from the Red Army in 1945. They would come to a farm and be very grudgingly permitted to sleep in the haybarn; two days later, the owners would be on the road themselves.

We are in this together; but I cannot see how the present political arrangement can tackle the challenges. There are too many ways for our leadership to be distracted, to be suborned and to escape consequences personally.

Crash, cash, gold stash

Max Keiser is emphatic that there will be another huge banking crisis within the next 6 - 9 months, and says that the Chinese are "aggressively" buying gold in anticipation of a currency collapse. His talk (esp. with regards to Goldman Sachs) is intemperate, as his French co-guest diplomatically points out, but he may be correct.

I don't know how it is for you in the US, but here the jewellers have recently been fielding TV ads offering to buy your gold. What a favour they are doing for you.

PS

Barry Ritholtz shares in a strange, ecstatic group experience.

This, I suggest, is a sign. Norman Cohn's mediaeval history "The Pursuit of the Millennium" notes that at times of great societal stress, there were mass outbreaks of spontaneous frenzied dancing, singing, visions.

Unconsciously perhaps, Ritholtz connects the two, for just before he describes the happening he says, "The multitudes were slowly moving thru the mass transit walkways like cows being led to slaughter." The people are feeling the fear and reaching for joy.

Prepare

Realistically, growth was far above where it should have been for close to seven years because of the Fed induced lending boom, insane lending standards, and extreme leverage and risk taking everywhere epitomized by "liar loans" and zero-percent down housing. Now is the payback time. We should be expecting growth to be below trend for the next seven years, with a few outliers tossed in for good measure to keep everyone excessively optimistic.

- Mish

1 And it came to pass at the end of two full years, that Pharaoh dreamed: and, behold, he stood by the river.

2 And, behold, there came up out of the river seven well favored kine and fatfleshed; and they fed in a meadow.

3 And, behold, seven other kine came up after them out of the river, ill favored and leanfleshed; and stood by the other kine upon the brink of the river.

4 And the ill favored and leanfleshed kine did eat up the seven well favored and fat kine. So Pharaoh awoke.

5 And he slept and dreamed the second time: and, behold, seven ears of corn came up upon one stalk, rank and good.

6 And, behold, seven thin ears and blasted with the east wind sprung up after them.

7 And the seven thin ears devoured the seven rank and full ears. And Pharaoh awoke, and, behold, it was a dream.

8 And it came to pass in the morning that his spirit was troubled; and he sent and called for all the magicians of Egypt, and all the wise men thereof: and Pharaoh told them his dream; but there was none that could interpret them unto Pharaoh.

- Genesis, Chapter 41

The East is [in the] Red

Here's an interesting one: the Contrarian Investor reckons a credit bubble could be brewing in China.

For now, a cloud no bigger than your fist on the horizon; but sometime... This is how we ourselves started, back in the 80s.

Masters of the Universe vs. the Lord's Elect

A bright gleam has caught the helmets of our bankers. Goldman Sachs is set to pay an average £500,000 bonus to its London traders. This modest lagniappe is the equivalent of merely 20 years' median annual remuneration for NHS nurses. It is heartening to see that amid the gloom of an economy wrecked by... well, anyway, I'm sure we all agree that they deserve it. Indeed, more; but we must hope they may reasonably expect further such emoluments in the years to come. Nothing is too good for our money-boys, or for the politicians whom they will accommodate when put out to grass.

On an unrelated note, I've suddenly recalled the episode in Evelyn Waugh's "Decline and Fall" where Paul Pennyfeather meets a madman in prison:

"Well, one day I was just sweeping out the shop before shutting up when the angel of the Lord came in. I didn't know who it was at first. "Just in time," I said. "What can I do for you?" Then I noticed that all about him there was a red flame and a circle of flame over his head, same as I've been telling you. Then he told me how the Lord had numbered His elect and the day of tribulation was at hand. "Kill and spare not," he says."

Fortunately, the nutter's victim is a Modern Churchman, not a vitally important, wealth-creating banker.

Many market "shorts" are due to expire on Friday, I understand. Perhaps the market - a free and unmanipulated market, you may be sure - will change its mood next week.

PS

The S&P 500 closed above 900 points yesterday. "Mish" has said that it could easily fall below 500 points, or stall for years. He is against "buy and hold." So who profits if the poor layman is persuaded to stay in the market?

Regardless of what strategy one uses, it is a horrible idea to hold stocks throughout recessions.

Why Is Bad Advice So Common?

Clearly, stay the course is bad advice. So why is it so common? A personal anecdote might help explain things: In January of this year, an investment advisor from Wachovia Securities called me up and stated "Mish, I am sitting on millions because I see nothing I like". I told the person I did not like much either and that Sitka Pacific was heavily in cash and or hedged. His response was "Well, I do not get paid anything if my clients are sitting in cash".

I called up a rep at Merrill Lynch and he said the same thing, that reps for Merrill Lynch do not get paid if their clients are sitting in cash.

Massive Conflict of Interest

Notice the massive conflict of interest possibilities. Reps for various broker dealers have a vested interest in keeping clients 100% invested 100% of the time, even if they know it is wrong. And so it is every recession, bad advice permeates the airwaves and internet "Stay The Course".

We own you

The Big Picture selects several articles for us on US debt.

This one points out that to balance the US budget with borrowing, new bonds must be sold totalling 3 times the amount issued last year. Bearing in mind that there's less money around, and that people are getting nervous about America's credit rating, inflation and the value of the dollar on the international market, it seems very unlikely that this new debt auction would succeed; and if it did, it would have to be on the basis of higher interest rates, to factor-in the various increased risks.

Alternatively, it's time for the repo man - with a twist. Nassim Taleb and Mark Spitznagel suggest that banks could take part of homeowners' equity in exchange for lower interest rates. But if houses continue to decline in price? I bet the banks have thought of that, so if such a scheme were introduced, they'd want a bigger share than most homeowners would be willing to give them. My guess is that when houseowners realize that the market isn't going to turn soon, there'll be more voluntary bankruptcies and doorkeys in the post. That, plus rising and lengthening unemployment could set off the domino chain.

But returning to the Sprott analysis, note that late last year, 28% of US debt was foreign-owned. Look out for some form of debt-for-equity here - if not the sale of equities, then in the form of favours and concessions. He who pays the piper calls the tune.

It's just the way things are?

UPDATE: The Big Picture begs to differ with the no-blame angle, and names names...

I've asked several times before, whether any country could have played it differently and avoided getting involved in The Crash. Then I read this article (htp: Jesse) about ex-BIS economist William White, and near the end there's an indication that maybe it's not simply about baddies and goodies:

White is more concerned about the things he doesn't understand. New Zealand is a case in point. Interest rates were raised early in the crisis there, and yet the central bank was unable to come to grips with the credit bubble. Investors were apparently borrowing cheap money from foreign lenders.

This is the sort of thing that worries him. "That's when you have to ask yourself: Who exactly is controlling the whole thing anymore?"

Perhaps his model has a flaw in that regard. Could it be possible that central bankers today have far less influence than he assumes?

The thought causes him to wrinkle his brow for a moment. Then he smiles, says his goodbyes and quickly disappears into a Paris Metro station.

...this time it vanished quite slowly, beginning with the end of the tail, and ending with the grin, which remained some time after the rest of it had gone.