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An array of evidence suggests that a crash in equities might be just ahead.

I know, I know, retail sales are up so everything’s wunnerful, but the captain of Global Equities Flight 2011 just instructed the passengers to assume crash positions. It seems the captain has the distinct advantage of being able to see what’s just ahead, not to mention being able to monitor the engines and fuel levels. (Hmm, did the starboard engine just conk out? Not good….)

Levity aside, there are unnerving similarities between the present and the pre-crash 2008 equities market. To make the case, let’s turn to some excellent charts from The Chart Storeand Ron Griess.

In the first chart, Ron has traced out the basic pattern and the percentage of stocks above their 200-day moving average (MA). Notice how weak that is compared to price.

Next, a chart which shows we’re right where the 2008 rally topped and tanked.

Last up, one of my favorites, an analog chart that overlays the present-day rally over the 1907 crash and rally. It is uncannily similar until QE2 saved the day for a few months. That pushed the present out beyond the 1907 line, but then current prices began falling until the most recent “6-week wonder” prop job once again saved equities from collapse.

Apparently we’re supposed to believe that channel-stuffing auto dealers and Americans-self-medicating-with-shopping-on-credit are really going to power the economy to ever greater heights of sales and profits. Anything’s possible, but despite the cheer and the constant calls for a year-end rally to end all rallies, the market is looking a little uncertain here.

Consider the broad-based Russell 2000, which seems to have traced out a beautiful head and shoulders pattern, as good a precursor to a crash as you can get.

The last time the RUT looked this ugly, the Powers That Be pulled one save after another out of their bag of tricks. Despite brave talk from Fed lackeys that “we have more amazing stimulus plans right here,” everyone knows they’ve shot their wad and have been reduced to playing around with Treasury yields that won’t do anything for the real economy. So all that brave talk about the next big Fed-rides-to-the-rescue is just that, hot air and paper-thin bravado.

For a very insightful chart of the RUT from a razor-sharp analyst, please see Technical Perspective: Repetition in the Russell 2000(Chris Kimble).

Zooming in a bit, let’s take a look at the S&P 500, where we see a classic wedge/pennant, the sort of thing that breaks big up or down. Given the abundant evidence of weakness, not to mention the potential for outright panic in global credit markets, does anyone not being paid to lie really think the probabilities favor a breakout here to the upside? Based on what? I know, I know, “seasonal patterns.” In other words, we’re depending on Santa to deliver the rally everyone needs to stay solvent.

It doesn’t take much imagination–none, really–to see the similarities between the July topping-out and the present. If volume is the weapon of the Bull, then everyone betting on the next big rally has to explain why volume has been declining.

Rather than get distracted with how much low-quality crap gets sold at loss-leader prices on November 25, we might be better served to focus on the U.S. dollar.As everyone knows, equities and the buck have been on a see-saw for a long time. If the dollar rises, equities drop. If the dollar rises a lot–for any reason, or no reason, it doesn’t matter– then equities crash.

If the euro weakens, the dollar rises. If the dollar rises, equities weaken. If there is anything else to know about the current equity market, how much can it possibly be worth?

He who sells first sells best. Something to ponder in the weeks ahead.

Charles Hugh Smith – Of Two Minds

Here’s the case for dumping stocks and not touching them for at least two years.

The case for “buying and holding” stocks boils down to four words:  don’t fight the Fed. Forget moral hazard and all the fancy stuff; the reason to load the truck with stocks is that the Fed is invincible, and its mighty machinery of manipulation can drive stocks higher no matter what else is happening.

Put another way: when the Fed succeeds in driving the dollar to near-zero, the value of stocks will be near-infinite.

The case to dump stocks now and not even look at the market for two years is based not on worship of the Federal Reserve’s infinite wisdom and power but on the charts.The abject, pathetic, remarkably complete failure of QE2 has driven a stake  through the heart of the Fed’s political power and its reputation for wisdom; it has been revealed as a clueless cabal, basing policy on textbook models of what “should happen when we do this.” Alas, real life doesn’t follow moldy old PhD theses, and it doesn’t worship the Fed or listen to the cargo-cult incantations of the Keynesians.

Financialization anf globalization have run their course, along with cheap abundant energy. As the giant 17-year bubble in stocks deflates, those entrusting their money with Wall Street face stupendous risk and potentially massive losses.  (Shameless pitch alert.) My new book An Unconventional Guide to Investing in Troubled Times is all about withdrawing your trust from Wall Street and investing your capital in alternatives such as localized, productive assets which do not depend on financialization or globalization for their value or income streams. (It’s currently #5 in the Kindle Store’s investing category, and #9 in Amazon’s Investing Bestsellers category, so there’s some interest in the topic.) You can read the first chapter and other stuff here.

Let’s let the charts speak for themselves, shall we?

Here is the S&P 500 from 1965 to 2011: note the giant double top, and the gigantic bubble which began inflating circa 1994 as financialization and globalization began their long domination of the economy.

Only massive government intervention reinflated the bubble in 2009-11, and now gravity is reasserting itself.  The trendline projects to the next low around 600, while  the bubble-retrace projects to around 450.

Since volume is the weapon of the Bull, let’s check in on volume: oops, it’s been dropping since 2009. Looks like those in the know have been selling into strength bigtime.

Courtesy of the always insightful Doug Short, here is Doug’s overlay of the current market and two previous stock market bubbles, the Dow 1929 and the Nikkei 1989.Note that the market was rolling over last August, but the Fed launched QE2 and added a year to the “recovery.”  Can they extend it another year? based on their dwindling political capital, the answer is “unlikely.”

Interestingly, the low hit by previous bubbles corresponds rather closely with cycle-seer Martin Armstrong’s turn date of July, 2013. (He also pegs August 2014 and September 2015 as turn dates as well.)

This overlay of the 2002 decline and the current market also offers food for thought.As in, “this sucker’s going down.”

Again courtesy of Doug Short, the Q Ratio, which is at highs not seen since the last market top.

Since the U.S. dollar and the SPX have been on a see-saw for years, it’s interesting to compare the DXY’s recent decline with its action back in the summer of 2008, just before the global financial Ponzi scheme imploded.

And to state the Bullish case, here’s the Fed’s pet parrot:

Looks like they’ll need to teach it another line.

Charles Hugh Smith – Of Two Minds

Go down the list, one by one, of the “Yea” House and Senate votes on the Debt Increase bill.  (Yes, I know the title is hinky – that’s because the House played games – again – to get this passed just as it did with TARP.)

They’re the people to thank for the selloff this afternoon, which got materially worse and added volume to it as soon as the Senate approved.

Make sure you thank each and every one of them for the losses you’ve taken over the last seven days in your 401k and IRA.  You were told, Americans, that passing this “borrow more to bankrupt us” would halt the slide in the market.

Guess what?

You were lied to exactly as you were in 2008 with TARP, which, when it passed, still left us with another huge slide before the market bottomed and resulted in a huge selloff – when it passed.  It was only when Congress allowed banks to lie about asset values that the slide stopped.

Unfortunately that card has already been played and isn’t available to play again.

Since your Reps and Senators told you that the market would stop collapsing if they passed this, ask them if they’ll cover your losses – even if just today’s losses.  Heh, it’s only 225 DOW points… today.

Welcome to 2008, Part Deux, where every lie that Congress tells you come with no consequence for them and there will be no apologies either.

Make sure you thank OBAMA too.  You’ve just seen close to 10% come off the markets entirely due to his demand to keep spending money we do not have.

The market is now negative for the year, incidentally.

How many times do you have to lose your retirement money before you stop allowing this crap to go on?

Anyone who thinks that “deficits don’t matter” needs to look at the absolute slaughter going on in Europe.

It is often said that Europe “isn’t like us” because they can’t print money.  Oh, but they can – they just need to do it in a coordinated fashion, just like our 50 states do (through the Federal Government.)

The problem is that printing doesn’t work.  It simply debases the currency.  No nation has ever managed to print its way to prosperity – or even stabilization.

We tried it in 1933 and it didn’t work.  It was 1941 before we found “stability”, and then only because we went to war and bombed to dust our global competitors’ ability to produce.

We’re trying it here too folks.  The Fed’s “QE” games are simply monetization – that is, money-printing.  $600 billion in deficits over approximately six months (or nearly $1,200 billion annualized) absorbed in government deficits.  Some call this “successful” and I suppose it is, if you measure it in the price of gallon of gasoline – which skyrocketed.

And why wouldn’t it?  If you increase the divisor of something (the number of dollars) the value of each of those things goes down. Duh.

Does the government care?  Not really.  They think “globalization” will save them.  If so how come China is slowing down?  Uh, perhaps because we exported a huge part of our inflation to them, and when you’re living at a subsistence level if that’s not stopped the people starve and thus riot?  They thus can’t allow that to happen or their nation burns – literally.

Is there a resolution to this problem?  Not a painless one.  Oh sure, we tried.  The government here literally printed up and sold Treasuries to falsely inflate final demand in our economy by 12% a year for three years, and when the market threatened to throw up on that The Fed came in and debased the currency.  But the claim of “pump-priming” turned out to be false; there was no water under the wellhead, and so once the prime ran out, so did the engine’s ability to run.

I said back last August – one year ago – that what was being done (1) would not work, (2) was simply compounding the damage, and (3) six to nine months later would filter through into the economy and start to show up.

So far, right on all three.  Three months ago we saw the first hints from consumer staples companies about cost-push problems.  This earnings season while earnings were ok forward guidance was consistently weak.  And now we’ve had a bad GDP report, a bad ISM report and this morning a bad consumer income and spending report.

The “talking heads” are saying that the weakness today is all about “uncertainty” over the debt deal.  Nonsense.  How about the flash-crash in the DAX futures yesterday after their cash close?  Are you going to tell me that the German markets collapsed because of us? Baloney.  That was “algos run wild”, just as we see here – right here, right now – and the German government is no more willing to address it and stick a sock in the big banks trading operations than we are.

Well, fine.  Just be aware of one thing: The next big collapse in the markets leaves The Fed and government with no ammunition to counteract it – rates are at zero and QE didn’t work except to crank up the price of food and energy.

You think this won’t happen eh?  Ok, go ahead and believe that.  Go ahead and believe that “we’re special.”  It worked out real well for you in 2008 and the value of your IRA or 401k, didn’t it?

I know, I know, there’s a bunch of people who say “it can’t happen again because the banking system is incredibly strong”, including Geithner.  Really?  Then why is Unicredit locking out down-limit day after day?  Why are European indices collapsing as I write this, with the ATX down 2.5%, the Dax down 1.6%, the CAC down 1.7%, Stockholm down 2.6% and the Swiss, usually the bastion of stability, down 3.68% with a rampaging Swiss Franc?

Oh yeah, that’s stability all right – in a pig’s eye.

I said in my 2010 update that Europe will not get their debt situation under control.  Well?  How’s it going for the Europeans?  You want to tell me that things are “under control”?  How?

Remember that in 2009 we were told by everyone that the recession “ended.”  Well how come Feldstein is on CNBC right now saying that we’re still in a recession?

Oh really?  Still in one eh?  I thought we were all done with recession in 2009?  Paul Krugman where are you?  Oh yeah, speaking of him, his solution is to print up yet more money and drive energy and food prices even higher, so we can be like the Chinese and starve 1/4 of the population, then try to figure out how to keep them from rioting!  You want to know how it’s stopped?  You stop the debasement – by force if necessary through Congress removing Bernanke via emergency legislation – and perhaps by removing The Fed itself. We will no more allow the dollar to be destroyed in that fashion than the Chinese will allow their people to starve as a result of our policies.

Four years ago this was solvable with a lot of pain but it would have been bearable and resolvable.  Today it’s worse.  If we don’t cut this crap out there will be no resolution at all and the ultimate result will be severe, widespread and potentially revolutionary civil unrest.

The madness must stop and those who advocated the positions and policies we adopted back in 2007 and 2008 must be held to account for their failed prognostications and the economic rape they have served upon the nation.  Remember, they claimed that we could “prime the pump”, “get lending going again” and thus “get the consumer back on track”..

These claims were lies as the reason we got in trouble in the first place was that the consumer’s ability and willingness to take on new credit was exhausted!

How much more evidence do you need folks?  Is not what we have on the table now enough?  Is not the fact that consumer spending is rolling over and multiple nations in Europe are threatened with monetary collapse sufficient evidence that “spend more to avoid going broke”, as Vice-President Biden said, does not work?

For exactly how long will you, the American people, sit back and allow this clown-car brigade in Washington and in the ivory towers of America to run proved failed policies and claim “they’ll work, just give us more time”?  Another year?  Two?  Five?

Will your tolerance level for this utter and complete crap run out before or after you’re starving and living under a freeway overpass?

We were promised results and “accelerating growth.”  What we got was a collapse in alleged “growth” instead, and now income, spending and soon employment will follow, as the only “recovery” was due to fake demand created by massive and utterly-unsustainable deficit spending.

See, I told you so.

Incidentally….

As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our ‘intellectual superiors’ and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 – the biggest ever bonus season (forget record bonuses in 2010… in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).

If someone asks you what happened in 2009, the answer is simple – two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed’s equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) – the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.

Back to the math… And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to “drain duration” from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all… none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating  demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

As we pointed, the number one reason why 2010 is set to be a truly “interesting” year is a result of the upcoming explosion in US Treasury issuance. Fiscal 2010 gross coupon issuance is expected to hit $2.55 trillion, a $700 billion increase from 2009, which in turn was  $1.1 trillion increase from 2008. For those of you needing a primer on the exponential function, click here. But wait, there is a light in the tunnel: in 2011, gross issuance is expected to decline… to $1.9 trillion.

And while things are hair-raising in “gross” country (not Bill…at least not yet), they are not much better in netville either. Net of maturities, 2010 coupon issuance will be about $1.8 trillion, a 45% increase from the $1.3 trillion in FY 2009 (and the paltry $255 billion in 2008).

Now everyone knows that the average maturity of the UST curve has become a big problem for Tim Geithner: nearly 40% of all marketable debt matures within a year (a percentage that has kept on growing). In fact, the Treasury provided guidance in its November 2009 refunding, in which it stated that it intends “to focus on increasing the average maturity” of its debt after relying heavily on Bill issuance in H2. Once again, we wish Tim the best of luck.

Why our generous best intentions to the US Treasury? Because unless the US consumer decides to forgo the purchase of the 4th sequential Kindle and buy some Treasuries (and not just any: 30 Year Bonds or bust), the presumption that the Bond printer will have the option of finding vast foreign appetite for its spewage is a very myopic one. We already know that China is a major question mark, and will aggressively be looking at pumping capital into its own economy instead of that of Uncle Sam’s – at some point the return on investment in its own middle class will surpass that of funding the rapidly disappearing US middle class. That tipping point could be as soon as 2010.

As for Japan – the country has plunged into its n^th consecutive deflationary period. Whether or not the finance minister announces yet another affair with the Quantitative Easing whore on any given day, depends merely on what side of the bed he wakes up on. The country will have its hands full monetizing its own sovereign issuance, let alone ours.

Lastly, the UK – well, with the country set to have zero bankers left in a few months, we don’t think the traditionally third largest purchaser of US debt will be doing much purchasing any time soon.

None of this is merely speculation: October TIC data confirmed these preliminary observations. It will only become more pronounced in upcoming months.

How about that great globalization dynamo: emerging markets? Alas, they have their hands full with issuing their own record amounts of both sovereign and corporate debt as well: in 2009 gross EM debt issuance reached an astounding $217 billion, $29 billion higher than the previous record in 2007. Gross EM issuance was particularly high in the last quarter at $73 billion, with October breaking the record for the largest ever monthly gross issuance of emerging market global bonds at $38 billion (January is traditionally the busiest month of the year.) With $81 billion, 2009 was notably a record year for sovereign bonds, while gross issuance of corporate bonds amounted to $136 billion, the second highest level after that of 2007 with $155 billion.

Bottom line: everyone has major problems at home, and is more focused on the supply than the demand side of the equation.

What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:

1. Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
2. Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke’s complete lack of preparation from a monetary standpoint (we are surprised the Fed’s $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
3. Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke’s forced intervention in bond and equity markets. Yet the President’s Working Group is fully aware that when the time comes to hitting the “reverse” button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.

If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors. Then again, as Eric Sprott has been pointing out for quite some time, it could very well be that the US economy has become merely one huge Ponzi, and as such, its expansion or reduction on the margin is uncontrollable. We very well may have passed into the stage where blind growth is the only alternative to a complete collapse. We hope that is not the case.

Merry Christmas and Happy Holidays to all readers.

The EURUSD 50 DMA of $1.41 is fast approaching, just as Goldman predicted. The dollar is now back to early September levels, as the predicted unwind of the carry trade is among us. Was the European implosion really all that unpredictable? With equities lagging, once the reality of the move is comprehended, look out below in stocks.

Will the 23.6 on the Fib be broken shortly and provide the new support level or will this be the mythical 1,115 on the S&P that just can’t be broken. We may get the answer today.