FedUpUSA

Archive for July 18th, 2011

Four charts cast a skeptical light on the Status Quo “stories” of endlessly rising equities and the doomed dollar.

Here are the Status Quo’s most important investment “stories:”
1) China will continue booming for decades
2) U.S. equities will continue soaring as profits continue rising
3) The U.S. dollar will continue heading down because Bernanke wills it to do so

I would love to believe these magical tales, but the charts cast a skeptical pall on the happy stories. Beauty and uptrends alike are in the eye of the beholder, so maybe you see uptrends in equities here; I don’t.

The chart of the SSEC Shanghai Index is downright ugly. The uptrend line has been decisively broken, and a giant pennant/flag pattern looks busted, too.

The SPX (S&P 500) has also busted its uptrend, and the fan pattern indicates a weakening trend off the March 2009 lows. Notice how the trendline that was support is now resistance–a classic technical sign of reversal.

The dollar’s slight uptrend was broken in Bernanke’s last-ditch effort to goose the equities market to a new high in April. Since then, the DXY has clawed its way higher while the indicators are showing positive divergence to the buck’s weak ascent.

There is great resistance just overhead above 76, as the trendline now offers resistance, as does the 50-week moving average. Those two are roughly aligning with the  upper Bollinger band.  On a slightly positive note, the lower Bollinger has turned up and the DXY has managed to hover at or above its 20-week moving average.

If the dollar closes decisively above 76.30, then Bernanke has lost control and equities are headed down: a dollar breakout will be in play.

Here is an analog chart of the Dow Jones Industrial Average from 1907 and the present, courtesy of Ron Griess and The Chart Store. Note the uncanny correlation of the two. Correlation isn’t causation,of course, so maybe the Dow will sprint to 15,000 from here. But this chart introduces the notion that if history and pattern-matching have any predictive value, the next move will be down.

The truism in technical analysis is that you can always find a chart or indicator to support your belief system. But if we look at these simple charts and simple lines without predisposed beliefs, then what story are they telling?

Of Two Minds

As I write this the DOW is down 178, the S&P is down 19, and the Nasdaq 100 is down 32, all well more than 1%.  In addition volume is more than 10:1 down on the NYSE and about 8:1 on the Nasdaq.

It’s a bloody day in the markets.

But one problem is apparent – the TNX, or 10 year Treasury bond interest rate, is actually up about 0.2% on the day, and the 30 year is up 1% in yield.

They shouldn’t be.

When investors get nervous about stocks, they usually flow to bonds.  Today, they’re not.  They’re buying Gold instead which is up just under 1%, or silver, which is up 3.2%, both on the day.

These correlations have been solid for a long time.  Now they’re failing.  This failure is telling you something – that our Congress and President had better get their heads out in the daylight instead of up their respective asses, and they better do it soon.

Oh sure, we’re not seeing the sort of out-of-control ramp in government bond rates that Italy has seen the last few weeks.

Yet.

But remember the 1930s.  A bank called Creditanstalt turned what was a nasty stock market crash and credit contraction into a global Depression.

Regulators then, as now, ignored the crash’s warnings and refused to force those who were not properly capitalized to close.  They allowed people to double into bad bets.  Those bad bets compounded, and when the economy started to slip for real, instead of just on paper, the leverage they were carrying, both that which everyone knew about and that which people did not, ultimately blew them up.

Now we have a “little bank” in Italy that is teetering on the same edge – Unicredit.  It is too big to bail out – it holds hundreds of billions in liabilities.  There’s no money available to bail them out and the time to resolve them, as with our banks, was two and three years ago.

The risks are extremely high here folks.  I know many have laughed at my warnings for the last three years and have hooted and hollered as the stock market “recovered”, buoyed by yet more cheap money.  But during this the coverage of government debt with employment has not recovered at all – in fact, it’s worse now by far than it was in 2008.

So now what’s available in terms of policy tools?  There’s no funds available to bail people out, and a bank of that size isn’t able to be bailed out anyway in reality – all you can do is lie and hope people believe it.  But the market is calling all the bluffs now, one after another.

Remember 2008?  Buffet was going to buy the world.  Then it was Korea’s Development Bank.  Both, and many more yarns that were spun, were lies.  Those who believed got skinned alive in the collapse that followed.

If you think it can’t happen again, you’re wrong.  It both can and will, and nobody will be held to account for the lies they tell, just as they weren’t the last time.

Our government isn’t helping.  We should have taken all the big banks into receivership and went through every one of their alleged “assets” in 2008, forcing them to prove by independent valuation that they were holding them at reasonable valuations and that their “credit insurance” was backed by someone with 100% of the actual cash required to pay.  We didn’t, because Paulson and Geithner both knew that under such a standard not one of the big banks would survive.

So instead of forcing bondholders to eat it, which is what should have happened, they rolled the dice.  They bet that there would not be another Creditanstalt.

This is now looking like a bet they are going to lose.

Homeowners’ lawyer alleges improper tactics by bank’s attorney.

An attorney who represents victims of foreclosures and mortgage fraud claims a senior partner with the law firm Bryan Cave LLP who represents Bank of America and Countrywide Mortgage is using underhanded tactics to try to put him out of business.

In the case filed in Orange County, Calif., Superior Court, attorney Gary Lane says the bank’s lawyers have used intentional and malicious tactics to prevent him from representing underprivileged defendants.

Lane operates a non-profit legal clinic, the Consumer Protection Assistance Coalition, in Irvine.

Lane, who has been in practice for 39 years, says that over the last three years his clinic began to handle a large number of cases involving homeowners wrongfully threatened by banks and mortgage lenders and has filed a number of suits against Bank of America and Countrywide.

Stuart Price, a senior partner at Bryan Cave, is responsible for handling Bank of America’s mortgage and foreclosure cases, the suit says and it alleges that in every case filed by Lane, Price files responses that include untrue and defamatory statements about Lane.

Lane’s suit lists actions that he alleges were taken solely to undermine his reputation and damage his business, including:

• failure to file a stipulation delaying a hearing, causing Lane to be sanctioned for not appearing;
• directed a witness to perjure herself, causing Lane to be sanctioned by the court;
• filed a motion asking that Lane be ordered to seek a judge’s approval before filing any additional actions against Bank of America; and
• filed a complaint with the State Bar taking issue with 78 lawsuits Lane had filed against Bank of America, causing Lane to be required to respond separately to each and every complaint;

Lane says that as a result of the law firm’s tactics, he has been required to spend “countless hours” responding to the tactical roadblocks.

In the case of the 78 complaints, Lane notes that the State Bar normally allows an attorney one month to respond to a complaint, anticipating that it will take that long to assemble a proper response. But since Price filed 78 complaints in a single document, Lane is being given only one or two months to respond.

Lane cites provisions in California’s civil procedure rules noting “a disturbing increase in lawsuits brought primarily to chill the valid exercise of the constitutional rights of free speech,” and alleges that the purpose of Price’s actions is to block Lane from bringing further lawsuits against Bank of America on behalf of troubled homeowners.

The suit seeks injunctive relief, legal fees and dismissal of the State Bar complaint.

Consumer Affairs

Ok S&P, go ahead and do it.

President Barack Obama would veto a House Republican proposal to impose mandatory budget cuts and set caps for government spending in order to raise the federal debt limit, the administration said in a statement.

S&P made clear that if whatever the Congress and White House come up with does not result in at least $4 trillion in actual reduced deficits over the next 10 years – not games, not scams, not “creative accounting” but actual reductions they will downgrade the credit rating on the US.

Incidentally, that’s not enough; it’s only a reduction of about 25% in the deficit from the last three years’ levels, and with medical spending forecast to rise rapidly and dramatically within the next handful of years, a $400 billion/year cut off “baseline” won’t do jack.

In order for this to result in a sustainable budget circumstance GDP would have to be growing for the entire ten year and beyond period at roughly 8% annually.  That is not going to happen – that sort of “requirement” is pure magical thinking unmatched by reality at any time we have growth figures from (going back to the 1950s.)  Since 1990 the average has been 4.86% and since 2000 4.16%.  Expecting double that is idiotic.

S&P, to be blunt, is giving the government a pass – they’re not requiring sustainable deficits, but rather just enough slowing in the trajectory that we’ll manage to kick the can down the road for another five to ten years.

Yet our President has said he won’t even sign that, say something that fixes the problem.

Go ahead S&P, issue the downgrade this afternoon.

We’ve earned it.

Debt must never, ever grow faster than GDP does, whether that debt is in a given sector (e.g. government, consumer, financial, etc) or in the nation as a whole.

The Economic Collapse