WHERE IS THAT MARKET CORRECTION WE'VE BEEN EXPECTING? We've been short the markets for two months. The first leg down was very lucrative. But where is the second leg down?
Stocks have been showing remarkable strength, mostly treading the water against a power gravity trying to force prices down. What is resisting continued selling? The U.S. Dollar.
We all know that what the Fed is doing with Quantitative Easing is 1) recapitalization of the banks, either directly, or through back-channels: handouts of cash or interest rate manipulation; 2) depressing the US Dollar to support asset prices. Ben Bernanke is essentially spending today's money to protect yesterday's debts -- saving the banks is still the name of the game -- so that we can all live in Happy Valley and our children and grand-children can pay our debts.
Bernanke traveled to Europe two months ago: his mantra was: "Buy the Euro; sell the US Dollar."
Of course a weaker dollar lowers the costs of America's exports -- it also (some would say artificially) strengthens any asset traded in Dollars. That is: houses, stocks, commodities, gold.
But stocks aren't soaring. Housing is stuttering higher, with acclaim from most the financial media, suggesting another 'Housing Bubble' might save us. Nothing will save us. We are following Japan, who followed our Fed's instructions in 1989, on how to pretend there was no such thing as deflation. If deflation is defined by negative spending in the economy -- just keep spending. If the consumer and businesses stop spending, have the government spend. We have to keep that GDP-o-meter in the 'growth zone'. Any kind of spending does this.
So Japan started buying up toxic bank debt (Private debt) with government money -- and they've been doing the same thing since 1989. Still no organic growth -- but, who cares. Everything looks good. GDP kept 'growing'.
Gary Schilling writes about this in "Japan's Debt Sustains a Deflationary Depression", and about Japan's attempts to combat its deflation with quantitative easing and perpetual increases in the money supply, which did not work.
Last year, Japan's gross government debt was 220 percent of gross domestic product, according to the International Monetary Fund, by far the largest ratio of any Group of Seven country. All governments lend back and forth among official entities so that their gross debt is bigger than the net debt held by non-government investors, and Japan does this more than other developed countries. Still, on a net basis, Japan's government-debt-to-GDP ratio is rivaled only by Italy's and leaped to 113 percent in 2011 from 11.5 percent in 1991.
Thus, Japan's government debt has gone up nearly 1,000% since 1989, when its Housing Bubble popped. Shares of the Nikkei Index, Japan's major stock exchange, are down 77% since 1989. The entire western world is going to follow Japan down that same path apparently -- unless Greece teaches us costly lesson, which I doubt.
Protecting asset prices through inflation by government spending to replace Private spending DOES NOT WORK.
Quantitative Easing did not work for Japan either:
Substantial quantitative easing by the BOJ (Bank of Japan) through purchases of government bonds didn't help much, either. Nor did the 3 percent annual increase in M2 money supply over the last two decades. And so far, the central bank's attempts to promote borrowing haven't worked: The trend since the mid-1990s has been to repay loans that weren't written off. Nevertheless, competitive quantitative easing by central banks is now the order of the day, and the BOJ is being outrun. Last year, it expanded its balance sheet by 11 percent, while the Federal Reserve's increased 19 percent, the European Central Bank's rose 36 percent and the Swiss National Bank's grew 33 percent.
Ben Bernanke continues to believe that QE is working (I don't think he really believes this any longer -- he has no other theories, no other avenue of continue denial, and he can't look the Devil in the eye: he is a coward) -- and the power of the Fed to continue to drive down interest rates and the US Dollar continues to make asset prices (bubbles) buoyant, but it does not help the economy. Why doesn't it help the economy? Because the basis of this policy is the attempt to protect debts (asset prices) artificially -- without real growth -- monetary growth is NOT economic growth -- something Japan also had tried to do, since its own debt-inflation fueled its Housing Bubble in 1989.
We are following Japan in our attempt to avoid going into the Black Forest of Deflation. But you HAVE TO go through the Black Forest. For this is where your soul gets refreshed, re-vitalized, cleansed and reborn. This is where the foundation of your society gets recreated (the garden gets re-conditioned, drained of Winter flood-waters -- and where the weeds and the bodies of the old dead, useless plants get eliminated -- the ground is cleared -- where replanting occurs).
Mitt Romney's insipid attempt to make China the enemy during the last election campaign showed the natural knee-jerk ploy of those with too little imagination. When things get tough, don't think, don't reflect on what you have done wrong -- and a mountain of debt is a pretty big pimple on our faces, is it not? -- find an enemy. The military loves that. So does the stock market -- there are big profits to be made in war.
The US Fed is the biggest currency manipulator in the history of the Earth. Quantitative Easing is currency manipulation in its rawest form.
James Street writes about why labeling China a 'currency manipulator' would be ludicrous:
On its face, this accusation is hypocritical to the extreme. All countries with central banks manipulate their currency, whether through increasing the money supply (inflation), or adjusting interest rates. It's in a government's best interest to maintain control over currency in order to stabilize costs. The Federal Reserve has been nothing but a currency manipulator since its creation, so what is really at issue here is the fact that China is operating in China's best interest, and not the interest of the United States' central banking cartel.
Nick Beams argues in his article "Currency War Warnings Follow US Fed's 'Quantitative Easing" that QE is essentially protectionist currency manipulation.
There are growing fears that the US Federal Reserve's policy of "quantitative easing"-the process by which tens of billions of dollars are pumped into financial markets every month-is sparking international tensions over currency values.
One of the consequences of the Fed's actions is to push down the value of the US dollar, thus worsening the competitive position of other major countries in international markets.
Following the latest decision, in which the Fed gave an indefinite commitment to purchase mortgage-backed securities to the tune of $40 billion per month, the Brazilian finance minister, Guido Mantega, repeated his earlier warnings of a currency war.
Interviewed by the Financial Times last Thursday, Mantega said the US move was "protectionist" and could have drastic consequences for the rest of the world. "It has to be understood that there are consequences," he told the newspaper. The Fed's latest move would have only marginal benefits, he said. There was already plenty of liquidity in the economy but it was not going into production. The real purpose of the measures was to depress the value of the dollar and boost US exports, he added.
Those who are disgusted with the Fed's naked abrogation of power from elected officials and the constitutionally-designed institutions of American government -- does the Fed's charter include 'manipulation of financial markets' in order to achieve an apparent 'happy valley' political scenario. Since Washington apparently does not have the testosterone level -- or the independence -- to openly test the Fed's punch through a public audit, perhaps it is time for some deep-pocketed Fed-adversary to file a class-action lawsuit against the Fed for currency and market manipulation.
Of course, on the surface, the only investors being hurt by the Fed's manipulation are the Bears -- in truth, Fed manipulation is undermining American's trust of Wall Street as a 'fair, balanced playing field' and the Fed's currency manipulation is undermining the Dollar's in every American's bank account and retirement plan.
We all know it's unpatriotic to short the market; and we know that bears are not really good Americans. But ALL Americans lose when their currency is being devalued, even if they don't believe it.
Defenders of Dollar Destruction argue that Dollar Destruction has led to a much higher standard of living. This is true, on the surface. But it isn't Dollar Destruction, alone, that has elevated our standard of living, it is the Debt we have used to replace the Dollar's Strength that has elevated our standard of living. The trouble is, Debt requires a HUGE repayment in the future -- that is, Debt requires the HUGE REPAYMENT PLUS (you have to pay back both the actual cost of borrowings plus interest on the loan). In the same way that bank profits since 1983 soared because of increased debt slavery of the population. Only the banks win from this. Nations and individuals spend the money of the future generations in order to replace Dollar Strength today with Dollar Weakness + Increased Debt.
I have three charts showing 1) Increased Bank Profits Since 1983 as a Product of Increased Debt Slavery of the Consumer; 2) US dollar weakness since 1900; 3) US Debt Growth Since 1920. These three charts all must be read together, to see how the banks have taken over America. Only the banks benefit from increasing debt. Unless we cancel the debt, break the banks, and reform our banking system to take the power away from the plutocracy of Wall Street Banks (of which the Federal Reserve Board is the power base, the real Presidency of the US now).
The power of the banks and financial institutions threaten our democracy. They need to be cut down. Banks need to become Public Service Institutions; and need to be run like run like the Public Electric Utilities.
Chart ONE: MODERATE US DEBT; MODERATE US BANK /FINANCIAL INSTITUTION PROFITS
CHART TWO. Purchasing Power of the US Dollar. This is what a weak currency/high debt exchange does to the dollars in your pocket and in your bank account.
This chart and the next chart show how to destroy a civilization.
CHART THREE. Our rising standard of living is being paid for by future generations.
Is the Dollar Deflation really working? Not if we look at two measures: 1) the Gold/Dow Ratio, which shows inflation-adjusted Dow Jones Industrial Returns. This chart is in perfect step with my 36-year cycles, 18 years up, 18 years down: 1911 (bottom); 1929 (top); 1947 (bottom); 1965 (top); 1983 (bottom); 2001 (top); 2019 (bottom): this chart shows the Bernanke Lie quite nakedly: the monetary inflation is not really growth, it is only inflation of assets (achieved by weakening of the US Dollar).
2) Industrial Production Machinery chart that shows we are headed into recession again -- this exposes the same lie. Monetary inflation is NOT growth. It is worse that just not-growth -- because the only thing it is growing is more debt, to protect the 'old money' debt, and to protect the status quo, built up on the lie that "Debt is Good'.
Who is that I head whistling in the clearing? I'm afraid it might be old Mephistopheles, intent on getting what we owe him -- our souls.
How to we free ourselves of the 'Old Money' Devil? Only one way. Austerity. Biting the bullet. Giving in to the deflation, and destroying all the debt we are holding through higher and higher interest rates. Hard times are coming, either now, or tomorrow. Take your pick. Will you pay your own debts -- or will you have your heirs pay them instead, so you can living in Happy Valley, living the Good Life (that really is not that good).
CHART ONE: Dow/Gold Ratio. Chart shows the 'real' Dow Jones returns. The inverse relationship of Gold and the US Dollar means that this is also a picture of the US Dollar, not just the Dow Jones Index.
CHART TWO. Industrial Production: Business Equipment. Tell me we are not heading back down into recession. Is QE really working?
TODAY'S STOCK ACTION. I began this by saying the stock indexes should have been coming down hard -- and I was impressed by the power of the bulls to tread water in the face of the gravity of the situation. I wrote that Dollar-weakness was supporting stocks -- and by this I could also have said Euro-strength is supporting stocks. Why? Why is the Euro strong? Not of its own making I would suggest. The Euro is a problem that cannot be solved. Massive Euro deflation is coming, but is being resisted by European and American and Japanese and Chinese central banks. Why? Dollar strength will capsize stock markets and commodity prices and the European Union.
A weaker Dollar does not help European and Chinese companies in terms of selling their products overseas -- but it does help them in terms of re-floating asset prices, especially stock markets. It's quite a bind, isn't it.
Another bind, of course, is that the world can NEVER let interest rates go up. If interest rates go up -- even a fraction -- then the whole world in bankrupt. Greece was the tip of the ice-berg. Greece (and Spain, and Ireland) is not only the birthplace of Western Civilization it is also the graveyard of Western Civilization.
Western Civilization is dying of debt. We can see the end, if we look up ahead, not very far. Where Greece is going, every indebted country is also going.
CAHRT ONE: Current US Dollar/Euro chart. Note the long decline in Dollar value was reversed in October, a reversal that was accompanied by a sell-off in stocks. The recent pullback in the Dollar shows in the chart -- the stock rally, rather weak in fact -- but I think the stock rally is ending today.
SECOND CHART: Overlay of UUP, Bullish US Dollar ETF, and OEX, S&P 100 Index. Note how the Dollar is running counter to US (and world) stock index. When the Dollar rallies, stocks falls back. The Dollar has, of course, been in a long-term decline.
I believe today marks the bottom of the UUP and the next move up. See the two 'X' marks I put on the chart. I believe that these two points are synchronous. I may be wrong. But the UUP is long-term oversold (pane 2 down, M2F ALT.
There are three lines in the top pane: UUP Price (green); OEX Price (red); and my CGTS Pre-Basic indicator (brown). Note that the CGTS PB indicator has made a long-term bottom and, although correcting slightly, its pitch (direction) is still positive. This suggests the UUP uptrend is still intact. Note that the climbing brown line has a bullish Dollar character and a bearish OEX (stock) character.
I think stock selling begins in earnest today or tomorrow. If the Dollar suddenly weakens, then all Bearish bets are off however.
Best wishes from Hanoi.
Michael J. Clark
CGTS, Hanoi, Vietnam
30 November 2012