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

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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 brett.arends@wsj.com

European Central Bank President Visits Council on Foreign Relations

The following is an article on European Central Bank exposure to Greek bonds. This is not big news – everyone knows that the ECB (and many European banks) have billions of Euros of exposure to Greek bonds.

Why have I mentioned this article? The President of the ECB gave a speech in New York City on Monday. Guess where he gave the speech? You guessed it – the Council on Foreign relations. Interesting choice of venue.

It seems that lots of prominent people find the CFR a great place to give a speech.

Still think this whole sovereign debt mess is not orchestrated? Here’s yet another subtle message by the global elite – ‘we’re still running the show’.

jg – April 28, 2010
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APRIL 28, 2010

Greek Crisis Poses ECB Risk
A default would cost the central bank, which accepts sovereign debt as collateral for loans

By BRIAN BLACKSTONE

Wall St. Journal

Jean-Claude Trichet, president of the European Central Bank, spoke in New York on Monday. The ECB's balance sheet is at risk amid Greece's sovereign-debt crisis.

FRANKFURT—The European Central Bank is struggling to limit the fallout from Greece's debt crisis on European financial institutions as it confronts a fresh problem closer to home: its own balance sheet.

Greek and other European banks likely have posted billions of euros in Greek government bonds and other securities as collateral for ECB loans. The central bank, which has largely replaced the private market as a source of funding for Greece, could face losses on its loan portfolio if Greek financial institutions fail and Athens defaults, analysts say.

That, in turn, could further dent confidence in the euro as well as investors' faith in the ECB's ability to manage the crisis.

"They need to protect their balance sheet" by demanding more collateral if necessary, "but the shock that this would send would amplify the pressure to the (Greek) banks," says Jacques Cailloux, an economist at Royal Bank of Scotland.

The ECB, which doesn't disclose how much Greek government debt it has accepted as collateral, has proved nimble in adjusting its rules in recent months. Many ECB watchers say it would find a way to keep credit flowing to Greek banks even if Athens edges closer to default, by further easing its collateral rules or going back to longer-term financing for banks.

Greek banks aren't the only ones at risk. French banks have nearly $80 billion in exposure to Greece, followed by Germany at $45 billion, according to the Bank for International Settlements. Within Germany, Hypo Real Estate has the largest exposure at €9.1 billion. Commerzbank holds €4.6 billion in Greek bonds, according to Germany's bank regulator, while public-sector banks known as Landesbanken hold billions of euros in Greek bonds.

Under ECB rules, if the collateral a bank posts for a loan loses value, the borrowing institution may be required to post more collateral. Such a demand by the ECB could exert even more stress on the weakest banks the ECB is trying to protect, however, raising questions as to whether it would take such a step in an extreme case.

Euro Zone Bets The House - May 10, 2010

Will more debt solve a debt problem? No – of course not. The Euro Zone is simply playing the bailout game – to give the appearance that European political and financial leaders want to prevent their sovereign debt problem from taking down the entire system. As we’ve learned – massive sovereign debt isn’t causing the problem – it is simply another symptom of the world’s debt based monetary system disease.

Treating a debt problem with another $1 trillion in debt is like throwing water on a drowning man. Thanks for the help. It would appear that most equity investors today (May 10th) think that this is a life preserver – they’ll soon learn the truth.

This following paragraph from the article below sums it up nicely.

“The whole package represents an enormous bet on governments' willingness and ability to implement austerity measures—and voters' willingness and ability to tolerate them—and that markets will now have confidence in these efforts. It doesn't address underlying solvency concerns.”

Now that we know how the system operates – what will these ‘austerity’ measures do to the system? The only thing keeping the world afloat (since private lending is tanking) for the past year and a half has been the willingness of the world’s governments to take on high levels of debt – to keep the world’s money supply from crashing. If governments pull back deficit spending – debt creation will fall far short of what is required to keep the money supply from crashing.

If you think this seems like a ‘no win’ situation – you would be correct. The system is ending. Debt saturation is taking down the entire system – individuals, corporations – now governments. It’s only a matter of time.

Get ready for massive market volatility. There are no more bullets left in the bailout gun. I believe we’re going to see wild swings ripple throughout the world’s financial system (stocks, bonds, commodities, etc.) – ending with a global flight from risk – long before anyone gets a chance to implement austerity measures.

One thing is for certain – with the ongoing debasement of the world’s currencies – gold will – once again – skyrocket in value.

jg – May 10, 2010
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MAY 10, 2010, 10:43 A.M. ET

Euro Zone Bets The House

By RICHARD BARLEY

Wall St. Journal

Euro-zone leaders, the International Monetary Fund and the European Central Bank have pressed the big red button marked "do not press" with a nearly $1 trillion package of loans, guarantees, swaps and outright bond purchases. Will it work?

The "shock and awe" strategy triggered a huge immediate relief rally, but key questions remain unanswered and ultimate success isn't assured. In any case, it represents a huge political gamble to restore confidence to markets, and it will have profound consequences.

The scale of the deal—in particular the size of the IMF's €250 billion ($318 billion) commitment, and the degree of international cooperation—surprised investors. At €750 billion, the package is around 8% of euro-zone GDP, an undoubtedly significant sum. Were anything approaching the full amount to be needed, it would mean that private creditors had deserted euro-zone markets: among them, Portugal, Spain and Ireland—the countries most in the markets' sights other than Greece, which has its own €110 billion package—need to borrow only around €90 billion for the rest of the year.

As a result, stocks soared, the euro surged, credit spreads screamed tighter and Greek, Italian, Irish, Portuguese and Spanish bonds racked up big gains Monday. But on the flipside, German Bund yields also rocketed, partly reflecting a reversal of last week's flight to safety, but also potentially marking the start of a longer-term convergence higher in euro-zone yields. The debt crisis has now been injected into the system itself.

But key details of the package are fuzzy. Of the up to €500 billion European Financial Stabilization mechanism, €60 billion will be available from the European Union budget, along the lines of an existing fund that was set up to aid EU members outside the euro zone facing difficulties. The other €440 billion would be funded via a special-purpose vehicle guaranteed by participating euro-area states. But how can states that might themselves be in need of support afford the guarantees? Will stronger states like Germany end up shouldering most of the burden? How will the conditionality attached to the plan work? Will funding be available when it is needed? Is this a step to a common euro-zone bond, leading ultimately to full-blown fiscal union?

Similar questions surround the European Central Bank's decision to start buying private and public debt securities, an astonishing U-turn coming just days after it had said that buying bonds wasn't under discussion. It's not clear what will be the scale and timing of purchases, or how they will they be sterilized. Is this simply a symbolic backstop bid? For the ECB to end up financing deficits that private creditors don't wish to would be a devastating blow to its credibility.

The whole package represents an enormous bet on governments' willingness and ability to implement austerity measures—and voters' willingness and ability to tolerate them—and that markets will now have confidence in these efforts. It doesn't address underlying solvency concerns.

If the bet fails, losses risk being socialized through an opaque, unsanctioned fiscal transfer mechanism. The euro zone already is being transformed. The need to prevent the European government-bond market from breaking down completely was urgent. But the price is harsh austerity, a further move toward a federal Europe, and the bailing out of private investors. Taxpayers may yet revolt at all three of those ideas.

—Richard Barley

Write to Richard Barley at richard.barley@dowjones.com

Central Bank Intervention Continues - June 1 2010

Computer programs and high frequency trading control the world's stock markets as retail stock buying has evaporated.

We see almost daily central bank intervention in the world's currency markets.

The Federal Reserve and the European Central Bank continue to support (aka buy) U.S. Treasury and European bonds to support runaway Sovereign deficits and keep interest rates from spiking.

Our markets are no longer free - and haven't been for some time. When does the house of cards fall?

jg - June 1, 2010

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Another Blatant EUR Intervention Leads To 150 pip EURUSD Move In Seconds

http://www.zerohedge.com/

http://www.zerohedge.com/article/another-blatant-eur-intervention-leads-150-pip-eurusd-move-seconds

Submitted by Tyler Durden on 06/01/2010 09:35 -0500

With all the grace of a drunk Keynesian at an Austrian economists meeting, the Central Banks once again kill the EUR shorts and intervene to prop it up, for a ridiculous 250 pips intraday move. And thanks to Germany's Economics Minister Rainer Bruderle, we now know that the Fed is actively manipulating the FX pairs. Thank you Ben Bernanke for making sure that Atari has some confidence left in the manipulated market, as no humans are left any more.