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It’s time to take your money off the table and go ultra-conservative. By ultra-conservative – I mean gold/silver and cash. At this point – leaving your money in anything else is tantamount to ‘letting it ride’, betting it all on black and rolling that little white ball – one more time.
Let me explain.
As you know, I’ve been watching financial markets closely over the past year. You also know that I believe we’re heading toward a significant economic decline based on the fact that our monetary system is unsustainable and what I see happening in the economy/markets today. Since I believe that we are very near some type of stock market ‘correction’, I have been closely watching markets for hints of anything out of the ordinary that could signal the next phase of this crisis.
I’m sending an email to you today because strange things have started happening. I have attached a couple of articles below from Chris Martenson that explains some of the market shifts we’re seeing – but he is certainly not the only one noticing. Many people are beginning to understand that markets are not behaving in a normal manner.
Before we get to Dr. Martenson’s blog posts – let me give you a few good reasons to get out of the market at this time.
1. Unemployment. For most of us, employment is the economy. Depending on how you measure unemployment – real unemployment in America is somewhere in the neighborhood of 16-22% if you count everyone who would work full-time if they could. Based on unemployment data released this morning for October – it appears that our economy lost another 200,000 jobs last month. Regardless of what economists & politicians tell us – no job recovery = no economic recovery. No economic recovery = no sales/revenue recovery for private/public companies.
2. Housing. Based on many mainstream media articles – it would appear that housing is rebounding somewhat. I believe that whatever positive news exists in the housing market is a direct result of the government’s $8K tax credit and artificially low mortgage rates (due to Federal Reserve actions). What happens when the tax credits expire and the Fed raises rates? The Federal Funds Rate will not hover near 0% forever. Based on our current Federal fiscal policies (massive budget deficits) – interest rates will rise dramatically at some point. What affect will this have on the stock market? Not good. We also should consider that many ‘option arm’ mortgages ($ billions) will reset in 2010 & 2011. I’ve read where the defaults on these exotic mortgages will be even worse than the sub-prime mortgage mess.
3. Commercial Real Estate. Two of the largest commercial real estate & small business lenders filed for bankruptcy last week (Capmark & CIT). This alone is very bad news for commercial real estate. With retail stores closing and retail/office vacancy rates increasing significantly – this isn’t going to turnaround quickly. When a billionaire real estate investor (Wilbur Ross) says that a ‘huge commercial real estate crash is beginning in the U.S.’ – it’s time to pay attention. With housing and commercial real estate in distress – bank failures will continue to accelerate. To date – 115 U.S. banks have failed since the beginning of the crisis. I’ve seen estimates that say anywhere from ‘hundreds’ to ‘thousands’ of banks are going to fail before this is over. Add in the fact that the FDIC insurance fund is effectively out of funds – and you have the beginning of a serious banking problem.
U.S. Dollar Index
5. Over the past 7 months, we have watched the largest bear market rally in our history. After the crash of 1929 – there were many bear market rallies followed by significant declines. The DJIA did not recover to pre-1929 crash levels until the 1950’s. The current stock market rally dwarfs all of those rallies. Does a 30-50% stock market increase (depending on the index) really make sense - long term? Do corporate earnings support the increase in prices? Current Price to Earnings ratios are at all time highs. If you leave your money in the stock market – then you are betting that corporate earnings are going to increase significantly – and soon. History tells us one of two things will happen – prices are going to fall or earnings are going to rise. Based on the current state of our economy – you know what I believe is going to happen. I believe you’re looking at a bubble about to pop.
6. Corporate Insider Stock Selling is at all time highs. Corporate officers of publicly traded companies are selling their own stock (vs buying) at ratios of 30-40 to 1. This is an all-time record and it gives you good insight into what corporate officers believe is going to happen. Would they be selling at this magnitude if they believed their stock price was going to increase? Absolutely not. Do you think that you, your broker or your financial advisor has better information than the people running the largest companies in the world?
7. Large companies are hoarding cash. If everyone is confident in an economic rebound – why are so many companies increasing cash on their balance sheets? What does this say about their views regarding future sales/revenue and earnings?
From the Wall St. Journal (yesterday):
Jittery Companies Stash Cash
After Crisis, Big Businesses Hoard Most Bucks in 40 Years; Google's $22 Billion Cache
In the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings. That is up from $846 billion, or 7.9% of assets, a year earlier.
8. If you are monitoring 3rd quarter earnings reports – then you’ve noticed that sales/revenue declines continue for most large companies. While many companies have beaten their ‘expected’ earnings – we see that sales/revenue declines of 5-30% (YOY) continue. Many companies continue to reduce expenses to meet earnings expectations – but I see no top line sales/revenue rebound. Can earnings increase significantly over time without top line growth? What does this say about current stock price to earnings ratios? What does this say about future stock prices? Couple this with corporate insider trading (selling at all-time highs) and that companies are hoarding cash – and we begin to see what people who know are thinking.
9. Our monetary system will continue to crush our economy until we have nothing. Honestly – a couple of very simple charts tell us all we need to know (below). Our monetary system requires our debt to grow – forever. If our debt stops growing – and our money supply begins to decline – all kinds of bad things start happening (loan defaults, foreclosures, bankruptcies, etc.). This is what you are watching today. Everything that is collapsing around us is happening because of our current monetary system (Federal Reserve - Fractional Reserve Banking System).
The U.S. needs to create approximately $4 trillion dollars in debt this year – just to keep the music playing. We simply can’t do it anymore. Our incomes have not kept pace with our debt and inflation is destroying the purchasing power of the dollar. The game is over. Most of us haven’t realized this because there are much more important things going on – like fantasy football and American Idol. I wonder what Paris Hilton is up to today?
We’re playing our fiddles while Rome burns.
10. You might ask - will our political and financial leaders do something before markets collapse? Let me ask you - do you see anything changing in Washington D.C.? We’re already borrowing over $1 trillion dollars this fiscal year to meet our current budget obligations – and our political leaders are trying to push through a new healthcare bill that will cost an additional $1 trillion dollars – as if the rules of finance do not apply to the Federal Government.
If you think that our political leaders have the knowledge and wisdom to prevent something catastrophic from happening – I think a quote from Joe Biden from earlier this year should sum up our expectations – ‘We must spend more money to prevent bankruptcy’. Enough said.
How about financial leaders? The Federal Reserve is promoting government stimulus programs while flooding the financial system with new money. Can we borrow our way out of this mess? Of course not. The U.S. Government is currently insolvent (liabilities far exceed assets) and heading straight down a path to cash-flow bankruptcy (unable to pay our debts as they come due). Printing massive amounts of new money will eventually destroy the value of the dollar – and we’re already seeing this trend today.
Bottom line – if you would like to place a bet that our current leaders will somehow solve this crisis before something catastrophic happens – I’ll take the bet and give you great odds.
If your 401(k) or IRA does not have a cash/precious metal investment option – you may be wondering about taking a penalty if you remove your cash.
Let me put it this way. Let’s say you got lucky in Vegas and doubled your money over a short period of time. The house then gave you two options. You can take 70% of your money (initial money plus winnings) off the table and give them 30% or you can put it all in play and let it ride again. What would you do? What do you think the house wants you to do? Our current situation is obviously not a game and there is much more at risk. Whether you realize it or not – you would have better odds in Vegas. The deck is stacked against us.
Don’t let pride and/or greed blind you from logic and reason. Don’t ignore the warning signs because you are trying to get all of your money back from last year’s market decline. It’s time to cash in our chips and go home.
My guess is that there are lots of brokers and financial advisors out there touting the recent market gains and telling people to continue to invest in stocks/bonds. If you have a broker/financial advisor saying these things – then you need to ask yourself a few questions. Does past performance have any bearing on tomorrow? The correct answer is no. How is your broker and/or financial advisor paid? Do they make money by selling more stocks and bonds? Do they lose money if you cash out stocks and bonds? Are they doing what’s best for you or only trying to make more money?
If you feel confident that your advisor passes these tests – then you have one final question to answer. Do you and your advisor understand our monetary system? Does your advisor know that our system requires exponential debt growth – forever? The quick way to know if someone understands the system is a very simple question – do you know how money is created in our system? If your advisor gives you a strange look and scratches his/her head – you have your answer. I say this because most people have no idea how the system really works – and even fewer have the analytical ability (or take the time) to understand the consequences of the system.
Well – that’s it. This is the last email you’ll receive from me on the financial system/crisis. I would really like to believe that markets will not decline significantly – but math doesn’t lie. Apples will always fall to the earth when dropped and exponential systems in a finite world will always fail when given enough time.
In theory, exponential systems continue on into infinity. In the real world exponential systems follow an exponential growth curve and then eventually suffer a catastrophic collapse. Theory has a funny way of failing when it bumps up against this thing called reality.
Chris Martenson used this example to explain the dangers of exponential growth:
Bacteria grow by doubling. One bacterium divides to become two, the two divide to become 4, become 8, 16 and so on. Suppose we had bacteria that doubled in number this way every minute. Suppose we put one of these bacterium into an empty bottle at eleven in the morning, and then observe that the bottle is full at twelve noon. There's our case of just ordinary steady growth, it has a doubling time of one minute, and it's in the finite environment of one bottle. I want to ask you three questions.
Number one; at which time was the bottle half full? Well, would you believe 11:59, one minute before 12, because they double in number every minute?
Second Question; if you were an average bacterium in that bottle at what time would you first realize that you were running out of space? Well, let's just look at the last minute in the bottle. At 12 noon it’s full, one minute before its half full, 2 minutes before its ¼ full, then 1/8th, then a 1/16th. Let me ask you, at 5 minutes before 12 when the bottle is only 3% full and is 97% open space just yearning for development, how many of you would realize there's a problem?
Exponential growth is sneaky. It doesn’t matter if you’re talking about bacteria or debt. One minute – everything’s fine. The next minute your world is collapsing. This is our world today. It’s 11:59 and we’re acting like everything is A-OK. If you want something else to keep you up at night – take a look at a graph of the world’s population growth over time. It’s the most important exponential graph in the world – affecting everything on a planetary scale (in the example above we’re the bacteria and the world is the bottle). Once again, we see something today climbing the steep incline of an exponential curve - but that’s a subject for another time.
When things eventually fall over the edge economically – there will be lots of people who will find out where they placed their faith. The most important of all questions you need to ask yourself now is – where is my faith? Who do I serve? Does my well-being rise and fall with the stock market? Does the world toss me around – or do I have a firm foundation for my life?
Most of the world has no idea what is coming. You are not one of these people.
John - November 4, 2009
Market Shift - Something Is Coming
Sunday, November 1, 2009, 8:36 am, by cmartenson
• A break in past relationships between the stock market, the dollar, and gold, along with a breakout in the VIX, could be signaling the beginning of an important turning point
• Capmark declares bankruptcy (CIT is next).
• A commercial real estate emergency is upon us.
• Is gold signaling a continuation of the financial crisis, or something more?
As you know, I spend a great deal of time combing the available market information for clues about what is happening in the economy and where it may be leading us. This past week (October 24 - October 31, 2009) showed some amazing developments indicating that a major turning point is once again upon us.
This assessment is based on several key events, including the bankruptcy of Capmark Financial, which kicked off the week, the return of volatility to the stock market (reminiscent of past tops), and the bizarre strength in the price of gold on Friday, even as the Dow peeled off nearly 250 points.
Let's take a look at these events one at a time...
Capmark Goes Belly Up
On Sunday, Capmark, one of the largest commercial real-estate lenders in the US, declared bankruptcy.
Capmark Seeks Chapter 11 (Wall Street Journal)
Capmark Financial Group Inc. has been one of the biggest lenders to U.S. investors and developers of office towers, strip malls, hotels and other commercial properties. An independent company that used to be the commercial lending unit of GMAC LLC, a financing affiliate of General Motors Co., it has been in financial straits for months and warned in September that it might have to file for Chapter 11 reorganization.
The filing comes amid similar troubles in the commercial-property arena. Mall-giant General Growth Properties and hotel-chain Extended Stay Inc. filed for bankruptcy in the past year, and more commercial-company real-estate ventures could fail, amid an inability to refinance debts and reduced customer traffic as consumers continue to pull back.
The difficulties are a blow to Capmark's private-equity owners. In 2006, a group led by Kohlberg Kravis Roberts & Co., Goldman Sachs Capital Partners and Five Mile Capital Partners paid $1.5 billion in cash to acquire lender GMAC's commercial real-estate business, which they renamed Capmark.
While the hundreds of billions in CRE loans that Capmark either made or serviced are now in jeopardy, the real problem here is that Capmark was up to its eyeballs in complex CRE derivative products:
The world changed this week (and most people have no idea).
I believe that the “temporary structural I-beam” that has supported our financial system for the past 8 months CRACKED on Sunday night with the bankruptcy of Capmark Financial. Capmark was THE ring leader in the Commercial Real Estate derivatives markets. Two days later GMAC declared they needed many more billions from the government. CIT will likely go down this weekend.
But the key to all this is that the Commercial Real Estate Derivative market is now IMPLODING. Everyone talks about the imploding Credit Default Swaps at AIG…which were bad but they are dwarfed by the derivatives related to Commercial Real Estate.
The Commercial Real Estate derivatives are the largest and most structured of all the derivative products. Just look at this 2007 presentation at a Mortgage Bankers Conference and you can see the insanity of these structured products.
For the curious, the linked PDF document in the above snippet provides a crystal-clear description of the mud that is a CRE derivative. If you can make any sense of that document, please call Fed right away, because they badly need to find someone who can.
While we wait for those complicated derivative products to blow up, and for Goldman Sachs to somehow make money on this badly failed investment of theirs, the more immediate issue is the more than $7 billion owed to unsecured creditors:
Capmark Files for Bankruptcy With $21 Billion in Debt
Capmark and its units owe $7.1 billion to the 30 largest creditors without collateral backing their claims, according to court documents.
The three biggest are Citibank NA, as administrative agent under the $5.5 billion credit agreement, with a claim of $4.6 billion; Deutsche Bank Trust Co. Americas, with claims of $1.2 billion and $637.5 million, respectively; and Wilmington Trust FSB with a claim of $500 million, according to court papers.
The bank with the largest exposure is Citi, possibly explaining their recent desperate move to jack up consumer credit card interest rates to 29.99%. Let's see...how has the stock of Citi been doing lately?
Not too well, as it turns out.
Also possibly connected to this is the news that GMAC is reportedly seeking an additional $5.6 billion from the US government.
GMAC seeks $5.6 billion more from government
The money that will probably go to GMAC raises another critical issue: what happens if financial institutions that have already received government funds need more money to continue operating or lending money to consumers and businesses? It is currently assumed that the largest banks like Citigroup and Bank of America are now on the mend and will be able to pay the government back the money that they have taken under TARP.
The driving forces behind this blow-up are not all that complicated to understand:
U.S. office vacancies are at a five-year high, apartment vacancies have hit a 23-year record, and retail centers are showing the greatest share of empty storefronts since 1992, according to real estate research firm Reis, Inc.
The US overbuilt commercial and retail space, and much of it is now sitting idle and burning cash at horrific rates. A recent trip to a mall in Holyoke, MA revealed a few empty storefronts and so few mall shoppers with bags of purchased goods that I actually felt out of place carrying mine.
One of the bigger and better investors in this arena recently said this about CRE:
Wilbur Ross Sees 'Huge' Commercial Real Estate Crash
Oct. 30 (Bloomberg) -- Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a “huge crash in commercial real estate.”
“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up.”
U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. The Moody’s/REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.
Given the size and complexity of the CRE market, the Federal Reserve, Treasury, and regulatory agencies will need to do some serious mopping up of this mess.
The problem is, the Fed is looking for ways to lighten its bloated balance sheet, not get in deeper right now. But I suspect that they will get in deeper. Not because they want to, but because they have to.
At any rate, I think that the Capmark situation was a key trigger event this week and that the ripples are just now lapping through the financial markets. One might think that we must be in a better position to handle such an event because we've been cleaning up the system for more than a year now. However, the reality is that there are more outstanding derivatives now than when we started. Even as the Fed and the Treasury were busy mopping things up over here, Wall Street was busy adding new risks over there.
Next up on my radar screen is CIT Group, which provides funding for small and medium-sized businesses. A freeze-up there would be catastrophic for tens of thousands of such businesses.
This company looks to be all but cooked at this point.
The size and scope of these disasters (Capmark and CIT), each of which would have individually rattled markets to their core just a few years ago, are now being shrugged off as "normal" - but they are not. These are extremely large, interconnected lynchpins of our overly-financialized economy.
A Change in Trend
In the markets this week, we saw some exceptional movements in the main stock indexes. The S&P 500 essential ground down all week from 1090 to 1040, losing 50 points by Thursday when the "miracle GDP report" was released, launching a 23-point gain.
This proved to be another sucker's rally; the next day, it gave up all of those 20 points, plus 7 more to boot.
Inquiring minds would like to know: Has the stock market topped? Was this all a bear market rally that has now ended?
One indicator I watch for signs that a change in trend is upon us is the so-called Volatility Index (VIX).
VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from this volatility by selling options. Often referred to as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.
When the VIX is very low, there's a good chance of a market selloff, and when the VIX is high, there's a good chance for a market rally. When the VIX changes from low to high or vice versa, it is usually a pretty good mark of a change in trend.
Recently the VIX has been very low, and this week it broke out of its former down channel in a convincing fashion, leading me to wonder if a change in trend in stocks is finally upon us.
More qualitatively, volatility tends to mark market tops as opposing sides (belief systems) duke it out, often quite violently in the end. This was true in 2000 and 2007, and we may be seeing it here as well.
The breakout in the VIX certainly looks convincing. I will wait to see what Monday brings before making any moves. I am very close to reapplying my market shorts, which have been on the sidelines (in a bond fund) since January of 2009, but I will wait to see what sorts of rescues are attempted this week before going "all in."
The Strange Behavior of Gold
What really stuck out for me this week was that gold, which has been tracking the stock market practically tick-for-tick for months, recovered in the afternoon, even as the stock market remained pinned to the floor.
The red arrows and the blue arrows cover the same time periods in both charts (which are at slightly different scales):
This was an unusual turn of events and got me thinking that perhaps there is something lurking in the background…another financial breakdown, or an Israeli attack on Iran, or something.
I have found that keeping a close eye on the behavior of gold is one of the better 'early warning' indicators out there. While it doesn’t ever tell us what is happening, it does inform us that something is happening. It has been unusually reliable for me over the years, but one has to watch it closely.
What I mean by this is that looking at just the daily close would not give quite as much information as looking at the intraday behavior. It is highly unusual to see that the break-away occurred at 1:00 (on a Friday!), because it means that it happened right at the close of the London Physical bullion market for the weekend and because Friday post 1:00 is nearly always a sell off to the close (I don't know why, that's just an observation).
If we compare the S&P 500 to gold on a percentage chart (below), we see that they have recently been tracking each other tick-for-tick, and even percent-for-percent…until this week.
In particular, the largest percentage spread occurred on Friday of this week, with gold only losing $3 while the S&P 500 gave up 29.
Of course, we could also look at gold compared to the dollar, specifically the USD index, as it has been trading in near-perfect opposition to the dollar for quite some time as well. In fact, stocks, commodities, and currencies have all been trading in a quite unnerving manner, with upticks in the dollar being associated with downticks in everything else. I cannot recall a time like this in all my years of watching the market, but I'd have to do an exhaustive data analysis to see if this observation is accurate.
Dollar up; stocks, commodities, and gold go down. And not just in the US either - but all over the globe, in near-perfect lockstep. It's almost as if the entire world's collective asset markets are trading as a single, gigantic blob. Like an enormous ocean liner without a single bulkhead. If the hull is ever pierced, the entire thing will sink.
In this next chart, we can see the relationship between gold and the dollar. If you trace each dotted line carefully you'll notice the near perfect "anti-dollar" behavior of gold (or is it the "anti-gold" behavior of the dollar?).
That last white candle for the dollar should have resulted in a pretty big sell-off for gold, but it did not. As I've already said, this is enough to make me sit up and begin watching everything with just a bit more vigilance and alertly scouring the weekend news.
Given the apparent lack of media concern over the bankruptcy of Capmark (beyond noting the facts), and given the odd strength of gold over this past week, my strongest suspicion is that we've got another financial crisis in the works. I believe that this is a ruined family weekend for many a Fed and Treasury staffer.
The stock prices of BAC, JPM, C, CIT, insurance companies, and other financial players are all signaling the same sorts of troubles I saw last spring before the big sell-off. While there always the possibility that another rescue will be engineered, we should be prepared for the possibility that one might not.
Speculating a bit, I think gold might be indicating that another Fed rescue is in the works, which will result in yet another round of dollar devaluation, as the world glumly concludes that the US is simply going to print its way out of every problem instead of taking its lumps.
Why the world has not already come to this conclusion is a great mystery.
I think that there is undoubtedly something brewing in the background, larger even than the nine bank failures announced this weekend. Something on the order of a renewed issue of insolvency for Citi, or perhaps a nasty derivative accident on the heels of the Capmark bankruptcy, is touching the core of the financial system.
The fact that the world's paper-asset markets are trading in such tight correlation (and have been for months) is additionally worrisome, because it means that an uncontained derivative accident will spread through all markets, leaving none untouched.
I strongly advise keeping a portion of your holdings in gold, in your physical possession, and always maintaining a sharp eye on your bank to assure that it is safe from entering FDIC receivership. While there have been no issues so far with any FDIC-insured accounts, I think that there is a strong possibility that we will see much greater difficulties going forward, including the possibility of actual losses (should a funding crisis develop).
My sense is that something is (again) seriously amiss. But as always, you should trust yourself and your own assessment of the situation above all else.
Severe Market Dislocation
Tuesday, November 3, 2009, 11:13 am, by cmartenson
This insider has been opened to allow for intra-day commentary on what is going on in the markets. As I see it there's something quite profound going on at the moment, I just don't know what it is yet.
As I wrote in the last Martenson Report, the behavior of gold was quite note-worthy as it ran counter to both the dollar and the stock market.
As of this writing, gold has suddenly vaulted to a new, all-time high even as the dollar remains in positive territory and the stock market is negative. Silver is following.
Here are the relevant charts.
That 60 cent move in silver over only 20 minutes is one for the books. I've not seen a move to the upside like that before, only the downside. Is it possible that stops work in both ways now in the metals markets? (note: that last sentence is said in jest...sort of...I've seen a lot of stop-clearing runs to the downside in silver over the years, this may be the first to the upside).
The Euro has broken down out of an intermediate uptrend channel (meaning it is weakening against the dollar) and this would ordinarily have resulted in an immediate gold (and silver) thumping. The stock market, inversely correlated with the dollar lately, is selling off as expected.
But not gold and silver. What gives?
Perhaps it's the emergence of a surprise buyer for half the IMF gold sales?
India buys half of IMF's gold for sale
MUMBAI/WASHINGTON, Nov 3 (Reuters) - The International Monetary Fund has sold 200 tonnes of gold to the Reserve Bank of India for $6.7 billion, quietly executing half of a long-planned bullion sale that has threatened to slow gold's ascent.
The deal, which surprised traders who expected China to be the most likely buyer, will relieve the gold market of some uncertainty over how and when the IMF would sell 403.3 tonnes of gold, about one-eighth of its total stock. The deal will increase India's gold holdings to the tenth largest among central banks.
Perhaps the movement in silver is related to the GATA report that several million ounces had been recently withdrawn from the Comex warehouses?
Perhaps there's another monetary/fiscal crisis in the works?
What are you seeing?