Monday, August 23, 2010

Hindenburg Omen Creator Has Exited the Market

If anyone has money in the stock market – time to pay attention.  September and October typically see high stock market volatility – and with much of the ‘stimulus’ ending – it could get interesting. 

U.S. stock mutual funds have seen a net ($) outflow for 15 consecutive weeks (totaling almost $50 billion).

If you are unfamiliar with the ‘Hindenburg Omen’ – it is a technical indicator that has preceded all U.S. stock market crashes since 1987. 

It has now been confirmed on three separate days over the past 2 weeks.

“It is named after the Hindenburg disaster of May 6th 1937, during which the German zeppelin was destroyed in a sudden conflagration." Granted, the Hindenburg Omen is not a guarantee of a crash, and the five criteria that must be met for a Hindenburg trigger typically need to reoccur within 36 days for reconfirmation. Yet the statistics are startling: "Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days." The last Hindenburg Omen occurred during the lows of 2009. Today, we just had another (unconfirmed) Hindenburg Omen. It is time to batten down the hatches - something big is coming.”

This link shows the criteria:

jg – August 23, 2010

Hindenburg Omen Creator Has Exited the Market

As we reported first, last week saw the second confirmation of the Hindenburg Omen, most recently sighted for the first time on August 12. Presumably this is an indication of putting one's money where one's mouth is (and away from the market).
From the WSJ:
The latest trigger has prompted the Omen’s creator, Jim Miekka, to exit the market. “I’m taking it seriously and I’m fully out of the market now,” Miekka, a blind mathematician, said in a telephone interview from his home in Surry, Maine. “I would’ve probably stayed in until the beginning of September,” depending on how the indicators varied. “That was my basic plan, until the Hindenburg came along.”

The Omen has been behind every market crash since 1987, but significant stock-market declines have followed only 25% of the time. So there’s a high likelihood that the Omen could be nothing more than a false signal.

But that isn’t stopping Miekka from taking any chances, especially as September, typically the market’s worst-performing month, sits only one week away.

“It’s sort of like a funnel cloud,” he said. “It doesn’t mean it’s going to crash, but it’s a high probability. You don’t get a tornado without a funnel cloud.” He added he’s not currently shorting anything, although he may look to short Nasdaq stock index futures in the next few weeks, “depending on how the technicals go.”

Despite the ominous forecast, there are some glimmers of hope. Miekka doesn’t expect to sit on the sidelines for very long. In fact, Miekka, who is an avid target shooter despite being blind, is looking at put volumes and various moving averages that will offer clues of when he will start buying again.

Monday, August 16, 2010

There Will Be No Double Dip - It Will Be A Lot Worse

More Truth.
This article contains a lot of good economic information that everyone should know.
We all need to take it one step further – and not assume that the governments and banks of the world are trying to prevent a collapse.
As I’ve said many times – a global economic collapse is part of a plan for world government and world domination.  There’s no way to sugar-coat this truth.
If you don’t think it’s possible - it’s time to learn how the world’s economy really operates.  It’s all about debt – and control of the world’s population.
Get ready – a global stock market collapse is coming – and soon.
jg – August 16, 2010

by Egon von Greyerz – Matterhorn Asset Management

No, there will be no double dip. It will be a lot worse. The world economy will soon go into an accelerated and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park. The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money printing of a magnitude that the world has never experienced.  But his will not save the Western World which is likely to go in to a decline lasting at least 20 years but most probably a lot longer.
The End of an Era
The hyperinflationary depression that many western countries, including the US and the UK, will experience is likely to mark the end of an era that has lasted over 200 years since the industrial revolution.  A major part of the growth in the last 100 years and especially in the last 40 years has been built on an unsustainable build-up of debt levels. These debt levels will continue to swell for another few years until the coming hyperinflation in the West leads to a destruction of real asset values and a debt implosion.
In the last 100 years the Western world has experienced a historically unprecedented growth in production, in inventions and technical developments leading to a major increase in the standard of living. During the same period government debt, as well as private debt have grown exponentially leading to a major increase in inflation compared to previous centuries.

Until the early 1970s the growth in credit to GDP had been going up gradually since the creation of the Fed in 1913.. But from 1971 when Nixon abolished gold backing of the dollar, virtually all of the growth in the Western world has come from the massive increase in credit rather than from real growth of the economy. The US consumer price index was stable for 200 years until the early 1900s. From 1971 to 2010 CPI went up by almost 500%. The reason for this is uncontrolled credit creation and money printing. Total US debt went from $9 trillion in 1971 to $59 trillion today and this excludes unfunded liabilities of anywhere from $70 to $110 trillion. US nominal GDP went from $1.1 trillion to $14.5 trillion between 1971 and 2010.  So it has taken an increase in borrowings of $50 trillion to produce an increase in annual GDP of $13 trillion over a 40 year period. Without this massive increase in debt, the US would probably have had negative growth for most of the last 39 years.
Total US debt to GDP is now 380% and is likely to escalate substantially.

The coming hyperinflationary depression and the credit and asset implosion that is likely to follow will most probably lead to the end of a 200 year era of growth for the Western world. If only the excesses from the 1970s were corrected we might have a circa 20 year decline. But more likely we will correct the era all the way back from the industrial revolution in the 18th century and this could take 100 years or more.
So after the tumultuous and very painful times that we are likely to experience in the next few years, the West will have a sustained period of decline. All the excesses in the economy and in society must be unwound. These abnormal and unreal excesses are not just corporate executives, bankers, hedge fund managers or sportsmen earning $10s to $100s of millions but also a total collapse of ethical and moral values as well as a breakdown of the family as the kernel of society.
Most people believe and hope that this major trend change could not happen today with all the measures that governments have at their disposal. But very few people comprehend that it is precisely the government interference, controls and regulations as well as money printing that have created the problems in the first place. Power corrupts, and the more pressure a government is under the more they intervene. Because they believe that their interference in the economy will save the country – read Obama, or the world – read Gordon Brown. Little do they understand that each interference, each regulation or each dollar or pound or Euro printed will exacerbate the problems of the economy manifold.
Governments now have two options; continue to spend and print money like the US or introduce austerity programmes like Europe. Whichever way they chose will not matter since they have reached the point of no return. The economy of the West cannot be saved by any means. But governments both in the US and in Europe will still apply the only method they know which is to print money.
Government is Stealing from the People
Very few people understand that money printing is a form of robbing the citizens of their money and their work. Money is supposed to be a medium of exchange for goods and services equalling the value of the good or the service produced.  For example, an individual works extremely hard to earn an annual wage of say $40,000 which he receives in the form of paper money. The government, due to its mismanagement and incompetence simultaneously prints $40,000 in order to cover its deficits. So the government has by pressing a button produced the same amount of money that a man had to work a year for. This is what is currently taking place all over the world and which will accelerate in coming months and years leading to a total destruction of paper money. Paper money has completely lost its function as a medium of exchange or a store of value. This is why gold is gaining and will continue to gain value against perishable paper that is called money.
Deflation Inflation or Hyperinflation
The only reason that the US could build up such a major debt is that the US dollar has been the reserve currency of the world and therefore the US has been able to finance its debts and deficits internationally. The US has now reached a point when debts have to increase dramatically for the country just to standstill. Like all Ponzi schemes this one will also come to an end – and this very soon. The US dollar will decline dramatically and lose its reserve status and the US government will be unable to finance its deficit in any market. This process will lead to endless money printing, collapsing treasury bonds (substantially higher interest rates) and the dollar becoming worthless in a hyperinflationary black hole.
Let us just reiterate that hyperinflation arises as a result of money printing leading to a currency collapse and not from demand pull. The slight deflation that we are experiencing currently is a prerequisite for hyperinflation. The fear of a deflationary implosion forces governments to print money, leading to a collapsing currency which historically has always been the cause of hyperinflation.
Real M3 (source: Shadow Government Statistics) is falling at an unprecedented rate. This is the precursor to economic decline, quantitative easing and inflation (see early 1970s in the chart).

Many “experts” make the analogy between the deflationary period in Japan since the 1990s and the US today. In our view the US is in a totally different situation for the following reasons:
  • In the early 1990s Japan could still export their production to the rest of the world.
  • In the current downturn all countries (even China and India) will suffer and there will be no one to export the problems to.
  • The ability to export made Japan a creditor nation with major payment surpluses.  US are a major debtor and have been for 25 years.
  • Japan had a very high personal savings ratio at the time (which has now disappeared). US has had a declining savings rate for years (the US savings rate is now going up which it always does in a downturn).
  • The balance of payments and the personal savings surpluses made it possible for Japan to finance their budget deficit without resorting to QE. Very soon he US will only be able to finance their deficits with QE and so will most of the rest of the Western world.
  • Japanese unemployment in 1992 was 2% and went slowly up to 5% by 2000 where it is now. Real US unemployment is 22% and increasing.
  • Many major sovereign states are now virtually bankrupt and the financial system is on life support. This was not the case in the 1990s.
The above are some of the reasons why the current US situation is totally different to Japan. QE will accelerate in the US and worldwide.
What will make this process so much more complex than the world has ever experienced is that the same development is likely to take place in many countries around the world simultaneously. It will most probably happen in the UK, the rest of the EU and most other European nations. Due to the total interdependence of the world financial system, it will be difficult to forecast which countries can withstand the coming worldwide tsunami of money printing but many Asian countries probably stand a good chance.
Can we be wrong in our forecast of a hyperinflationary depression? Yes, of course we can. But the alternative can only be a deflationary collapse which would be unacceptable to (dropping money from) helicopter Bernanke and deficit demagogue Obama as well as most other governments.
Conventional wisdom and most experts say that we will not have inflation but deflation. The problem with most conventional wisdom is that it is only conventional without an ounce of wisdom. When have the world’s so called experts, politicians etc ever been right on the current crisis? They will be wrong this time again.
The “conventional wisdom experts” also say that it will be years before we can see inflation or hyperinflation. In our view it can happen a lot faster. The world economy is resting on a foundation of matchsticks. All that is needed is a change in confidence or psychology for this fragile foundation to crumble.Falling currencies, rising bond yields and falling stock markets could very quickly result in a vicious and fast spinning hyperinflationary circle. The frailty of the financial system could make this happen like a flash fire.
Wealth Creation
Banks and the financial industry have throughout history existed in order to finance production and trading of goods. But in the last 100 years and especially in the last 20-30 years it has become a major industry in its own right and an important but unproductive part of the economy in many countries. Today, the financial industry is too a great extent involved in trading for its own and clients’ accounts, creating a raft of obscure instruments that only benefit the banks and as well as financing consumption rather than investment. All of these areas are totally non-productive and the only beneficiaries are the participants in the financial industry. And the rewards have been absolutely astronomical. In investment banking, hedge funds and private equity in particular, the most massive wealth has been created. Many players have become billionaires or created fortunes of tens to hundreds of millions of dollars in the last 10-15 years just by shuffling money around. In the past fortunes were created by building factories and industries. But today any normal employee working in Wall Street or the City in London will, by just showing up to work, make hundreds of thousands to millions of dollars. This is the proof of a world totally out of balance when people dealing in money become the richest segment of society. Since this activity contributes very little to the prosperity of a nation (but very much to its participants) it is not sustainable. The biggest reason why it exists is the massive amount of money that governments have created or printed and the fact that the financial industry has developed into a fractal wealth creation machine for the benefit of its participants.
For the last 40 years in particular the rich are getting richer and the average person has seen very little increase in real income. In the US, the real annual income of the bottom 90% of US families has increased by only 10% since 1970. And in the expansion between 2002 and 2007, median US household income dropped $2,000. The perceived increase in wealth for the majority of Americans derives from an increase in their debt level not from an increase in real earnings. So the improvement in living standards that the average American and many other Western countries have enjoyed in the last 40 odd years is primarily based on debt – debt that can never be and will never be repaid with normal money.
On the other hand, management has achieved a major increase in income and wealth. In 1973, chief executives in the US earned 26 times the median income. Today they earn 300 times. This enormous widening of the gap between the top few percent in society and the masses is morally and socially unacceptable. When the bad times start in earnest, this is likely to lead to major social unrest and violence directed against the privileged.
The Focus will Shift
For a major part of 2010 the focus has been on the problems within the EU starting with Greece, then Spain, Portugal, Italy etc. The problems in Europe are major and many European countries as well as the European financial system will lead to massive money printing. Although the problems in Europe are very serious, the US economy is in a much worse state. The diversion of the focus away from the problems in the US economy onto Europe has suited the US Administration perfectly. It can hardly be a coincidence, for example, that US rating agencies downgrade the Sovereign debt of Greece and Spain on the same days as Treasury auctions are held. But the problems in the US economy are deteriorating at a rapid rate; factory orders, consumer confidence, existing home sales, retail sales, the ECRI index (Economic Cycle Research Institute) are all falling more than expected and real unemployment, personal bankruptcies (will exceed 1.6 million in 2010), trade deficit, state and federal deficits are all increasing.
The ECRI index is an important leading indicator. It has now fallen for 10 straight weeks.

There are three insurmountable problems in the US economy that are of a magnitude and gravity which can only be remedied by money printing:
  • Federal and state deficits will soon escalate at an exponential rate. The US Federal debt has increased from $ 8 trillion in 2006 when Bernanke took office to soon $ 14 trillion. Many forecasts expect this debt to go up to nearer $ 20 trillion in the next 5 years. In our view it will be substantially higher. Add to that interest rates of 15% or higher and the American people will work just to pay taxes that don’t even cover the interest payments on the federal debt. This is why the US will either default or more likely print unlimited amounts of money.
  • The real unemployment rate is now 22%. Since 2007 over 8 million Americans have lost their jobs and it will get a lot worse.  Non-farm unemployment in the 1930s reached 35% and we would expect this level to be reached in the next few years.
  • The financial system is bankrupt. Banks are failing at a much faster rate than last year. To date circa 110 banks have failed. More seriously the assets of the failed banks are only worth an estimated 30-50% of their balance sheet value. Banks are valuing their toxic debt at phoney values with the blessing of the government. But even debt that today is considered safe will soon turn toxic with the consumer coming under enormous financial pressure. Add to that the OTC derivatives held by US banks of at least $ 400 trillion. A big percentage of these are worthless and there are virtually no reserves to cover potential losses.
Within the next few years, the three areas above are likely to result in the biggest money printing programme in world history and simultaneously lead the US (and many other countries) into the abyss.
There has probably never been a period in world history which has caused the amount of wealth destruction that we are likely to see in the next few years. If we are correct in our assumption that the West will see a correction of the excesses of the last circa 40 years but more probably of the last 200 years, since the start of the industrial revolution, we could see a total annihilation of the assets that have been fuelled by the credit bubbles. The spike in asset values in the last 100 years, which is unprecedented in history, is likely to be corrected by a waterfall which could start at any time. We will issue a separate report in the next 10 days covering our market predictions and the importance of physical gold for wealth preservation purposes.
16th August

Egon von Greyerz

Friday, August 13, 2010

Is a Crash Coming?

It’s rare – but occasionally you’ll see a mainstream media article that contains some truth.

This is one of those articles.

For the record – the Fed is not ‘nervous’ or ‘worried’ about these developments.  The Fed created these developments.

From the article – here’s the #1 reason things are heading south.  Remember – this is what happens when your money is created by debt.  Eventually – the math of exponential debt growth catches up to you – and runs you over.

“People still owe way too much money. Households, corporations, states, local governments and, of course, Uncle Sam. It's the debt, stupid. According to the Federal Reserve, total U.S. debt—even excluding the financial sector—is basically twice what it was 10 years ago: $35 trillion compared to $18 trillion.”

If you think this is a mystery to the Federal Reserve, the Bank of England, the European Central Bank, the IMF, Bernanke, Greenspan, Obama, Geithner, etc., etc. – you’re living in a fantasy.

I have a feeling that the next couple of months – which have historically seen significant stock market volatility – will be rather exciting.

jg – August 13, 2010

August 13, 2010

Is a Crash Coming? Ten Reasons to Be Cautious

Wall St. Journal

Could Wall Street be about to crash again?
This week's bone-rattlers may be making you wonder.
I don't make predictions. That's a sucker's game. And I'm certainly not doing so now.
But way too many people are way too complacent this summer. Here are 10 reasons to watch out.
1. The market is already expensive. Stocks are about 20 times cyclically-adjusted earnings, according to data compiled by Yale University economics professor Robert Shiller. That's well above average, which, historically, has been about 16. This ratio has been a powerful predictor of long-term returns. Valuation is by far the most important issue for investors. If you're getting paid well to take risks, they may make sense. But what if you're not?
2. The Fed is getting nervous. This week it warned that the economy had weakened, and it unveiled its latest weapon in the war against deflation: using the proceeds from the sale of mortgages to buy Treasury bonds. That should drive down long-term interest rates. Great news for mortgage borrowers. But hardly something one wants to hear when the Dow Jones Industrial Average is already north of 10000.
3. Too many people are too bullish. Active money managers are expecting the market to go higher, according to the latest survey by the National Association of Active Investment Managers. So are financial advisers, reports the weekly survey by Investors Intelligence. And that's reason to be cautious. The time to buy is when everyone else is gloomy. The reverse may also be true.

Crowds panic on Wall Street on Oct. 24, 1929.

4. Deflation is already here. Consumer prices have fallen for three months in a row. And, most ominously, it's affecting wages too. The Bureau of Labor Statistics reports that, last quarter, workers earned 0.7% less in real terms per hour than they did a year ago. No wonder the Fed is worried. In deflation, wages, company revenues, and the value of your home and your investments may shrink in dollar terms. But your debts stay the same size. That makes deflation a vicious trap, especially if people owe way too much money.
5. People still owe way too much money. Households, corporations, states, local governments and, of course, Uncle Sam. It's the debt, stupid. According to the Federal Reserve, total U.S. debt—even excluding the financial sector—is basically twice what it was 10 years ago: $35 trillion compared to $18 trillion. Households have barely made a dent in their debt burden; it's fallen a mere 3% from last year's all-time peak, leaving it twice the level of a decade ago.
6. The jobs picture is much worse than they're telling you. Forget the "official" unemployment rate of 9.5%. Alternative measures? Try this: Just 61% of the adult population, age 20 or over, has any kind of job right now. That's the lowest since the early 1980s—when many women stayed at home through choice, driving the numbers down. Among men today, it's 66.9%. Back in the '50s, incidentally, that figure was around 85%, though allowances should be made for the higher number of elderly people alive today. And many of those still working right now can only find part-time work, so just 59% of men age 20 or over currently have a full-time job. This is bullish?
(Today's bonus question: If a laid-off contractor with two kids, a mortgage and a car loan is working three night shifts a week at his local gas station, how many iPads can he buy for Christmas?)
7. Housing remains a disaster. Foreclosures rose again last month. Banks took over another 93,000 homes in July, says foreclosure specialist RealtyTrac. That's a rise of 9% from June and just shy of May's record. We're heading for 1 million foreclosures this year, RealtyTrac says. And naturally the ripple effects hurt all those homeowners not in foreclosure, by driving down prices. See deflation (No. 4) above.
8. Labor Day is approaching. Ouch. It always seems to be in September-October when the wheels come off Wall Street. Think 2008. Think 1987. Think 1929. Statistically, there actually is a "September effect." The market, on average, has done worse in that month than any other. No one really knows why. Some have even blamed the psychological effect of shortening days. But it becomes self-reinforcing: People fear it, so they sell.
9. We're looking at gridlock in Washington. Election season has already begun. And the Democrats are expected to lose seats in both houses in November. (Betting at InTrade, a bookmaker in Dublin, Ireland, gives the GOP a 62% chance of taking control of the House.) As our political dialogue seems to have collapsed beyond all possible hope of repair, let's not hope for any "bipartisan" agreements on anything of substance. Do you think this is a good thing? As Davis Rosenberg at investment firm Gluskin Sheff pointed out this week, gridlock is only a good thing for investors "when nothing needs fixing." Today, he notes, we need strong leadership. Not gonna happen.
10. All sorts of other indicators are flashing amber. The Institute for Supply Management's manufacturing index, while still positive, weakened again in July. So did ISM's new-orders indicator. The trade deficit has widened, and second-quarter GDP growth was much lower than first thought. ECRI's Weekly Leading Index has been flashing warning lights for weeks. Europe's industrial production in June turned out considerably worse than expected. Even China's steamroller economy is slowing down. Tech bellwether Cisco Systems has signaled caution ahead. Individually, each of these might mean little. Collectively, they make me wonder. In this environment, I might be happy to buy shares if they were cheap. But not so much if they're expensive. See No. 1 above.
Write to Brett Arends at