Japan - A Few Thoughts On The "Crash"

by Lance Roberts

CNBC:  Global Markets Roiled by Nikkei's 7.3% Slide  "Financial markets around the world were roiled Thursday after Japanese stocks suffered their biggest slide since the country was hit by a devastating tsunami more than two years ago.  Several reasons have been blamed for the 7.3 percent fall in the Nikkei index to 14,483.98, including a spike in Japanese government bond yields and unexpectedly weak Chinese manufacturing figures."

That was the news that dominated the financial headlines today around the globe this morning.  However, while the selloff was certainly large in magnitude, the largest since the nuclear disaster in 2011, it must be put into some sort of context.  The chart below shows the Nikkei 225 going back to 1981.

There are numerous points that are worthy of consideration:

1) While the Nikkei has had a parabolic rise since the implementation of "Abe-nomics" the current rally failed at the long term downtrend resistance.

2) As shown in the callout - while the Nikkei did suffer its largest drawdown since 2011 it has hardly registered a blip when compared to the entirety of the recent advance.  If this did indeed mark the top in the Nikkei the correction still has a long way to go just to reach the 12-month average.

3) The rise in the Nikkei pushed the markets well beyond 3-standard deviations above the 12-month moving average which is simply unsustainable.  As with the U.S. markets - such extensions will ultimately lead to a reversal.  However, reversals do not occur without a catalyst.  The problem is that by the time you realize what the catalyst is - it will be too late to react.

4) The extreme divergence from the 12-month moving average, as shown at the bottom of the chart, is at levels that have normally been associated with major market tops.   While such extreme deviations are important it does not mean that the markets are going to crash immediately.  It does mean, generally speaking, that the majority of the advance is already complete and the risks, without a correction first, outweigh the potential for returns.

The Big Picture

While Japan has entered into an unprecedented stimulus program (on a relative basis twice as large as the U.S. on an economy 1/3 the size) there is no guarantee that such a program will result in the desired effect of pulling the Japanese economy out of its 30-year deflationary cycle.  The problems that face Japan are similar to what we are currently witnessing in the U.S.:

• A decline in savings rates to extremely low levels which depletes productive investments
• An aging demographic that is top heavy and drawing on social benefit schemes at an advancing rate.
• A heavily indebted economy with debt/GDP ratios above 100%.
  
• A decline in exports due to a weak global economic environment.
• Slowing domestic economic growth rates.
  
• An underemployed younger demographic.
• An inelastic supply-demand curve
• Weak industrial production
• Dependence on productivity increases to offset reduced employment
  

The unanswered question remains as to whether, or not, monetary policy can generate economic recovery.  The world's central banks have "bet it all" that it will indeed work.  The problem, as is always the case is such monetary experiments, remains the unintended consequences.

The lynch pin to Japan, and the U.S., remains interest rates.   If interest rates rise sharply it is effectively "game over" as borrowing costs surge, deficits balloon, housing falls, revenues weaken and consumer demand wanes.  It is the worst thing that can happen to an economy that is currently remaining on life support.  Japan, like the U.S., is caught in an on-going "liquidity trap"  where maintaining ultra-low interest rates is the key to sustaining an economic pulse.  The unintended consequence of such actions, as we are witnessing in the U.S. currently, is the ongoing battle with deflationary pressures.  The lower interest rates go - the less economic return that can be generated.   An ultra-low interest rate environment, contrary to mainstream thought, has a negative impact on making productive investments and risk begins to outweigh the potential return.

The mistake that Japan is likely going to make is believing that if they can generate some inflation for the economy that they will have the ability to cap it at 2%.   This is beyond naive and is likely to end very badly.   The following video from Christine Hughes sums the entire situation up very well and is worth watching in its entirety.

 

The point here is that the current blip in the Nikkei is likely going to be short lived as liquidity injections continue to artificially inflate assets.  However, as in the U.S., parabolic rises in asset prices eventually lead to extreme corrections.  If the "grand experiment" in Japan does indeed fail, which is what I suspect will eventually happen, the ramifications on the U.S. markets are likely to be quite severe.

The two charts below show the current extension of the S&P 500 Index.  The first chart shows the S&P 500 as compared to its 3-standard deviation range above and below the 50-week moving average.   Currently, the index is at levels, much like the Nikkei, that have denoted major market peaks.

The next chart shows the deviation of the S&P 500 price above its 50-week moving average.  Here, also, the index is at historically high levels.

So, what does the "crash" in the Nikkei mean?  Most likely not much in the near term as long as "Abe" and Bernanke continue to push liquidity into the financial markets.  The current bias for assets prices remains to the upside as investors remain completely agnostic towards risk.  Despite a threat of war from North Korea, weakening global economics, deterioration in the Eurozone, a slowdown in China or a slowdown in corporate earnings - investors remain solely focused on Central Bank interventions as a driver of asset prices and a complete hedge against investment risk.

"With central banks fully engaged in lifting asset prices through monetary policy - what could possibly go wrong?"

However, in the end, it will be the realization of "fear" that drives volatility substantially higher leading to the rapid deflation in asset prices.   In this case Roosevelt was wrong - it is the "lack of fear" that we should fear the most.

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The Fed's Real Worry - A Pick Up In Deflation

by Lance Roberts

In several of my recent missives I have made several references to the wave of deflationary pressures that are currently encircling the globe. 

In "Japan: A Few Thoughts On The Crash" I stated:

"The unintended consequence of such actions, as we are witnessing in the U.S. currently, is the ongoing battle with deflationary pressures. The lower interest rates goes the less economic return that can be generated. An ultra-low interest rate environment, contrary to mainstream thought, has a negative impact on making productive investments and risk begins to outweigh the potential return."

Also, in "Bernanke's Link to "Mother Nature"

"How many more natural disasters will come to offset the negative economic impact of a zero interest rate environment coupled with a wave of deflationary pressures is unknown."

But most importantly in "Why Bonds Aren't Dead & The Dollar Will Get Weaker" I stated:

"A wave of 'disinflation' is currently engulfing the globe as the Eurozone economy slips back into recession, China is slowing down and the U.S. is grinding into much slower rates of growth. Even Japan, despite their best efforts through a massive QE program, cannot seem to break the back of the deflationary pressures on their economy. This is a problem that has yet to be recognized by the financial markets.

The recent inflation reports (both the Producer and Consumer Price Indexes) show deflationary forces at work. Wages continue to wane, economic production is stalling and price pressures are falling. More importantly, there are downward pressures on the most economically sensitive commodities such as oil, copper and lumber all indicating weaker levels of economic output. The battle against deflationary economic pressures has been what the Federal Reserve has been forced to fight since the financial crisis. The problem has been that, much like 'Humpty-Dumpty', the broken financial transmission system, as represented by the velocity of money, can't be put back together again."

The last paragraph above is particularly important.  The biggest fear of the Federal Reserve has been the deflationary pressures that have continued to depress the domestic economy.  Despite the trillions of dollars of interventions by the Federal Reserve the only real accomplishment has been keeping the economy from slipping back into an outright recession.  However, when looking at many of the economic and confidence indicators, there are many that are still at levels normally associated with previous recessionary lows.  Despite many claims to the contrary the global economy is far from healed which explains the need for ongoing global central bank interventions.  However, even these interventions seem to be having a diminished rate of return in spurring real economic activity despite the inflation of asset prices.

Despite the ongoing rhetoric of those fearing inflation due to the Fed's monetary interventions the reality is that such actions have, so far, failed to overcome the deflationary forces of weak global demand.   The chart below is the spot price of copper.   Copper, often dubbed "Dr. Copper", is very sensitive to economic growth as copper is used in everything from production, to manufacturing, transportation, housing, etc.   So goes copper - so goes the economy.   Copper is currently confirming the peak in economic growth for the current cycle.

However, the question remains, do we have inflation or don’t we?  Are we experiencing the 1970’s all over again as inflation kills the economy, or in the words of Ben Bernanke, have we entered an era of low inflation and interest rates that will last for some time as the threat of deflation remains a prevalent enemy to the economic recovery? 

3 Components Of Inflation

I believe that there are three components required to create a truly inflation environment.

Commodity price inflation is certainly one of them as it does immediately impact the consumptive capability of the average consumer.   However, in order to see true pricing pressures across the economy there are two other factors that are critical; 1)the velocity of money, or how fast money is flowing through the system from the banks to small businesses and ultimately consumers, and; 2) wage growth which gives the consumer increased purchasing power.

Why are these two factors so critical to overall inflation question?   In the most recent  NFIB survey only a small fraction of respondents stated that this was a “good time to expand their business” while the majority of respondents stated that their major concerns were “poor sales, taxes and government regulations”.  If you are a small business, who coincidently creates roughly 70% of all new jobs in the economy, and you are worried about poor sales prospects and a weak economic environment, it is highly unlikely that you are going to borrow money to expand your business or extend credit to customers.  Businesses in turn choose to hoard cash as a hedge against a weak economic environment instead of making productive investments that will lead to more jobs and higher wages.

Besides the rise and fall of commodity prices, which do indeed contribute to the inflationary backdrop, the demand for money to make productive investments by businesses which leads to higher levels of production, wage growth and, ultimately, consumption is what drives overall inflation.  It is important to remember that in economics inflation is:

"...a rise in the general level of prices of goods and services in an economy over a period of time.  When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy."

It is very difficult to have a "general rise in price levels" amidst a lack of consumer demand driven by suppressed wages, high levels of unemployment and little demand for credit by businesses. The lack of demand exerts downward pressures on the pricing of goods and services keeping businesses on the defensive.  This virtual spiral is why deflationary environments are so dangerous and very difficult to break.

I have constructed a composite "High Inflation Index" in an attempt to measure these three legs of inflationary pressures.  The purpose, of course, is to visualize the data to determine if inflation is prevalent in the current economic cycle or not.   The index is equally weighted of the M2 Velocity of Money, the Year Over Year (YOY) percent change in wages and the YOY percent change in the Consumer Price Index (CPI).  The first chart shows the historical levels of each of the three components.

Notice that there is a very tight relationship between the rise and fall of compensation of employees and the velocity of M2 money supply.  With M2 velocity plunging to historically low levels this does not bode well for sustained increases in either employment or compensation as the demand for money simply does not exist currently.  The next chart is the weighted average of the three components into an index.

The index clearly shows the "high inflationary" pressures that were prevalent in the 1970’s as the economy suffered real inflation and rapidly rising interest rates.   Recently, inflationary pressures rose as economic growth surged from the lows of the financial crisis as the economic system was flooded by trillions of dollars of stimulus, bailouts and financial supports.  However, that surge, in both the economic growth and the inflationary pressures, peaked in early 2011 and have been on the decline since.  This is why the Federal Reserve remains extremely worried about the diminishing rate of return on their monetary experiments as it relates to the economy.  Inflating asset prices higher have increased consumer confidence but has had little translation into the creation of underlying economic growth.

With the index clearly warning of rising deflationary pressures in the economy, which has recently been seen in many of the manufacturing reports that have shown downward pricing pressures both on prices paid and received, there is no "exit" currently for the Federal Reserve to reduce its monetary supports.  The real concern is that with the index at just 4.88%, which is well below the long term average of 11.63%, that the economy is far to weak to handle much of an exogenous shock.

The risk, as discussed recently with relation to Japan, is that the Fed is now caught within a "liquidity trap."  The Fed cannot effectively withdraw from monetary interventions and raise interest rates to more productive levels without pushing the economy back into a recession.  The overriding deflationary drag on the economy is forcing the Federal Reserve to remain ultra-accommodative to support the current level of economic activity.  What is interesting is that mainstream economists and analysts keep predicting stronger levels of economic growth while all economic indications are indicating just the opposite.

Despite the Fed's recent communications that they are planning to "taper" the current monetary program by the end of this year - the index is suggesting that their interventions, in one form or another, are unlikely to end anytime soon.  The threat of "deflation" remains the Fed's primary concern.

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SPY Trends and Influencers May 25, 2013

by Greg Harmon

Last week’s review of the macro market indicators suggested, running into the Memorial Day Weekend that the equity markets continued to look strong but with the potential for rotation into the small caps noted the previous week still showing. It looked for Gold ($GLD) to continue the trend lower while Crude Oil ($USO) was biased higher in its neutral channel. The US Dollar Index ($UUP) was on the verge of a full blown bullish move higher while US Treasuries ($TLT) were biased lower. The Shanghai Composite ($SSEC) also looked to be ready to move back higher while Emerging Markets ($EEM) were biased to the downside as they consolidated. Volatility ($VIX) looked to remain a non factor and should be ignored until it breaks above 22 keeping the bias higher for the equity index ETF’s $SPY, $IWM and $QQQ, despite the moves to new highs. Their charts agreed although the SPY was showing the most signs of caution as the IWM and QQQ plow forward.

The week played out with Gold holding its ground while Crude Oil moved up early, only to pull back later in the week. The US Dollar consolidated higher while Treasuries did the same at their recent lows. The Shanghai Composite made a higher high before pulling back while Emerging Markets broke there consolidation lower. Volatility bounced off of the lows again but remained subdued. The Equity Index ETF’s made new all-time and closing highs on the SPY and IWM with multi-year highs on the QQQ before starting a pullback mid-week. What does this mean for the coming week? Lets look at some charts.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

SPY Daily, $SPY

SPY Weekly, $SPY

The SPY made new all-time highs Monday, Tuesday and Wednesday, before pulling back to end the week less than 1% lower. The pullback nearly made it to the 20 day SMA on the daily chart, and Thursday and Friday printed Hollow Red Candles. This two days of bullish intraday action (I posted on Hollow Red Candles Thursday night). The RSI on the daily chart is pulling back and the MACD is moving lower off a new high. These all bode for more downside price action. Notice that the volume is slowing again though. Out on the weekly chart the Evening Star is a potential reversal candle if confirmed lower next week. The RSI on this timeframe remains bullish and hovering around the technically overbought level. The MACD is continuing to rise. This timeframe looks higher still. There is support lower at 163 and 159.72 followed by 157 and 153.55. Under 153.55 and this turns bearish. Resistance is found at 166.50 and 167.50 followed by 169.07. Short Term Consolidation or Pullback in the Uptrend.

Heading into the shortened unofficial first week of Summer there is some nervous caution in the markets. Gold looks to consolidate with a downward bias while Crude Oil churns in the tightening range. The US Dollar Index seems ready for a pullback in the recent uptrend while US Treasuries are biased lower in their consolidation. The Shanghai Composite looks strong but Emerging Markets are biased to the downside. Volatility looks to remain benign keeping the bias higher for the equity index ETF’s SPY, IWM and QQQ, despite short term pullbacks and recent new highs. Their charts show more caution with a further pullback or consolidation likely. Use this information as you prepare for the coming week and trad’em well.

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The Quiet Collapse of the Italian Economy

By Roberto Orsi

While attention on the Euro crisis has been focusing primarily on Greece and Cyprus, it is no mystery that Italy, alongside with Spain, constitutes the real challenge for the future of the common currency, in any direction events will be unfolding.  In the relative silence of the international press, Italy’s macroeconomic situation has been showing no sign of improvement, and indeed numerous indicators portray a national economy which finds itself in a depression, rather than in a however severe recession. It is no overstatement that the Italian economy is currently collapsing.

Italy is the third largest economy of the Eurozone (after Germany and France), holds the largest public debt (over €2 trillion), which has been growing at an astonishing pace, even in more recent times and particularly as a ratio to GDP (130%), since the latter is contracting fast. How is this sustainable? Well, it is not. But for the moment, thanks to the ECB direct interventions (€102.8 billion of Italian bond purchases in 2011-12) and especially to the LTRO mechanisms, the finances of the Italian state can still be kept afloat. Italian banks have been absorbing €268 billion of liquidity issued by the ECB by means of the LTRO programme. In its essence, the mechanism is the following: because the ECB cannot lend liquidity directly to the states, except in times of absolute emergency and for the stabilisation of financial markets in the short term (as happened in 2011), it lends money to the banks, which in turn purchase government-issued bonds. Interestingly, the LTRO scheme has also become an instrument for the relatively orderly withdrawal of international investors from Italy, especially French and German, whose share of public debt has fallen from 51% to 35%, mirroring the rise of Italian banks purchasing public debt. This is an important signal, which goes in the opposite direction of an increased interdependency as would be expected from a monetary union in preparation for a political union. It is arguable that many investors are actually systematically reducing their exposure in South Europe, possibly hoping that a future breakup of the common curency will have less harmful consequences if their involvement in the financial and economy destiny of those countries is curtailed to the minimum. For Eurosceptics, it is a signal that, once all foreign investor withdraw, Italy will be left to its fate.

The truth is that the Italian state went bankrupt in summer 2011, when interest rates on the national debt went out of control, and as a result Italy lost access to the financial markets. Of course, because of the sheer dimensions of Italy as an economy and as a debtor, the ECB and political authorities in Europe have agreed to create around the country’s finances the appearance of a market, which is in fact, as the numbers above show, largely artificial. Ideally, Italy should stay on this artificial support until the economic conditions improve and confidence is restored to such a level that the country will have again access to a “normal” credit market.

However, this is not happening and there is no sign it is going to happen in the years to come. The situation of the Italian economy is simply dramatic. Recently, a study has appeared which reveals how the current crisis (2007-2013) is in many ways much worse than the 1929-1934 contraction. In the present crisis, investments have collapsed by 27.6% in the five year period, against 12.8% in the interwar depression. GDP has declined by 6.9% against 5.1%. Italy, with the second largest manufacturing sector in Europe after Germany, has lost about 24% of its industrial production, going back to the 1980s level. No data is currently showing any sign of recovery. From the beginning of this year, the country has lost over 31,000 companies. Every day 167 retail units are lost, signalling an authentic disintegration of the retail sector. The automotive sector, a crucially important one for the Italian economy, has been constantly contracting: from about 2.5 million cars sold in 2007, sales in 2012 reached only the 1.4 million mark (the 1979 level) and they are still contracting this year. Construction, the other pillar of the national economy, is in rout: the 14% slump in 2012 is only the last in a series of difficult years. Home sales have dropped by 29%  in 2012 against the already miserable 2011, to the 1985 level of 444,000 units, about half the number of 2006. Of course, the consequences of this economic disaster in terms of loss of employment are dire: unemployment is now at almost 12% and growing fast. Half a million workers have been put in stand-by and receive a state funded social benefit (cassa integrazione): it is projected that this year again the state will pay well over a billion work hours equivalent of this benefit. Needless to say, it is far more likely for all these workers to lose their job, rather than being re-integrated in the production cycle.

The Italian state has so far managed to defend its financial position by means of increased taxation, limited spending cuts and more borrowing. As illustrated above, the borrowing scheme has been engineered with the help of the ECB and the banking sector. Taxation has now reached unprecedented levels, and it is asphyxiating the economy together with the credit crunch. Spending cuts have been implemented to a certain extent, but like taxes they have a depressing effect on the economy, not to mention their unviability in a largely clientelistic, if not openly kleptocratic system.

Under pressure from the European Union, Italy has committed to a rigorous budget and it has even introduced a balanced-budget amendment in its constitution. Absurdly, the Italian state runs a surplus when public debt interest payments are excluded, but this only appears to be because, purely and simply, the state often “forgets” to pay its suppliers (the outstanding debt to private companies is in the €90-€130 billion range, depending on the criteria for calculation).

Now, it is not difficult to imagine that, in a few months, despite the new taxes, the sheer collapse of entire sectors of the economy will cause a rapid contraction of tax revenues. The Italian state cannot possibly accumulate even more debt at a faster pace (at least for Italy, the austerity debate makes little sense). Italy will simply run out of options, and it will require additional measures from the EU. Essentially, some sort of bailout. But because of the sheer size of the economy  and the public debt, this is simply impossible. In the absence of any political consensus around a radically different monetary policy of the ECB, i.e. unlimited QE, which will probably never materialise, and which will clearly not solve any of the country’s structural problems, the only realistic scenario will be that of a debt restructuring or renegotiation, as suggested by Nouriel Roubini in a precise analysis published more than 18 months ago. The collapse of the Italian state finances is rapidly approaching. It will have an enormous impact on the Eurozone and the European Union.

 

"Mentre l’attenzione sulla crisi dell’euro è focalizzata principalmente su Grecia e Cipro, non è un mistero che l’Italia - con la Spagna - sia la vera sfida per il futuro della moneta comunitaria. Nel silenzio della stampa internazionale, la condizione della macroeconomia italiana non mostra alcun segno di miglioramento: anzi, numerosi indici ritraggono un’economia nazionale in depressione piuttosto che in severa recessione. Non è esagerato affermare che l’economia italiana sta crollando. L’Italia è la terza economia dell’eurozona, dopo la Germania e la Francia, ed ha contratto il più grande debito pubblico (più di duemila miliardi di euro) che è andato crescendo ad un ritmo sorprendente, persino in tempi recentissimi ed in particolare in rapporto con il PIL (130%), visto che quest’ultimo sta rapidamente contraendosi. Come è possibile che un tale debito sia sostenibile? Infatti non lo è! Per il momento, grazie alla BCE (che ha acquistato 102,8 miliardi di euro di debito italiano tra il 2011 e il 2012) e specialmente al meccanismo LTRO, le finanze italiane hanno potuto essere tenute a galla. Le banche italiane hanno potuto assorbire 268 miliardi di euro di liquidità emessa dalla BCE grazie al programma LTRO, il cui meccanismo è il seguente: "Dato che la BCE non può prestare liquidità agli Stati, eccetto in caso di emergenza estrema e per ragioni di stabilizzazione dei mercati finanziari a breve termine, la presta alle banche che acquistano titoli di credito governativi". E’ interessante notare che LTRO funziona come strumento per permettere il ritiro in buon ordine degli investitori internazionali dall’Italia, specialmente francesi e tedeschi, la cui quota detenuta di debito italiano è passata dal 51% al 35%, facendo sembrare che fossero le banche italiane a ricomprare il debito nazionale. Questo è un segnale importante, che va in senso contrario alla interdipendenza che ci si aspetterebbe nel quadro di un’unione monetaria e di una prossima unione politica dell’eurozona. E’ realistico pensare che molti investitori stiano riducendo sistematicamente la loro esposizione in Europa del Sud, nella speranza che una prossima uscita dall’euro avrà per loro conseguenze meno gravi. Per gli euroscettici significa che, una volta che gli investitori stranieri si saranno ritirati, l’Italia verrà abbandonata al suo destino.
La verità è che lo Stato Italiano è fallito nell’estate del 2011, quando gli interessi del debito nazionale andarono fuori controllo e, come risultato, l’Italia perse l’accesso ai mercati finanziari. Ma, a causa dell’importanza dell’Italia come realtà economica e come DEBITRICE, la BCE e le autorità politiche europee hanno acconsentito alla creazione artificiosa di una parvenza di mercato attorno alla finanza pubblica italiana. L’Italia avrebbe dovrebbe rimanere sotto questa tutela fino a quando la situazione economica interna non fosse migliorata migliori insieme alla fiducia dei mercati per tornare ad accedere al mercato del credito. Ma questo purtroppo non avviene e non ci sono segni che lascino sperare che ciò accada nei prossimi anni. La situazione dell’economia italiana è semplicemente drammatica.
Recentemente è apparso un rapporto che rivela come la crisi attuale (2007-2013) sia molto peggiore di quella del 1929-1934. Nella presente crisi gli investimenti sono crollati del 27.6% in cinque anni, contro il 12.8% della recessione tra le due guerre. Il PIL è sceso del 6.9% contro il 5.1%. L’Italia, il cui comparto manufatturiero è secondo in Europa dietro la Germania, ha perso il 24% della sua produzione industriale, tornando ai livelli del 1980. Nessun dato mostra segni di ripresa. Dal’inizio dell’anno, il Paese ha perso più di 31.000 aziende ed ogni giorno chiudono 167 punti vendita al dettaglio, un’autentica disintegrazione del settore della distribuzione. Il settore dell’auto, uno dei più importanti, non fa che contrarsi: dai 2,5 milioni di vetture vendute nel 2007 siamo giunti ai 1,4 milioni di oggi, come nel 1979 e continuano a scendere. L’edilizia, altro pilastro dell’economia nazionale, è alla rovina: la caduta del 14% nel 2012 è l’ultima di una lunga serie. Le vendite di alloggi sono scese del 29% nel 2012 rispetto al 2011 che fu una catastrofe, fino al livello del 1985 di 440.000, la metà del 2006. L'impatto di questa tendenza sull’impiego è drammatico: la disoccupazione e’ giunta al 12% e sale rapidamente. Mezzo milione di lavoratori sono in cassa integrazione, e appare certo che a breve termine perderanno il loro impiego invece di essere reintegrati nel ciclo produttivo. Lo Stato Italiano si è finora arrabattato per difendere la propria posizione finanziaria per mezzo di ulteriori tassazioni, piccole riduzioni di spesa e altri prestiti. Come illustrato prima, lo schema di questi nuovi prestiti è stato architettato con la BCE e il settore bancario. La tassazione ha raggiunto livelli record, e con la stretta creditizia sta asfissiando l’economia interna. I tagli di spesa sono stati applicati fino ad un certo punto ma, come l’aumento delle tasse, hanno un effetto deprimente sull’economia per non parlare della loro difficile applicazione in un sistema clientelistico per non dire apertamente cleptocratico come quello Italiano.
Sotto la pressione della UE l’Italia si è impegnata a misure rigorose di controllo della spesa pubblica, fino ad introdurre un emendamento costituzionale per farle rispettare. Sembra assurdo ma il bilancio dello Stato appare in attivo se non si considerano gli interessi passivi sul debito, ma questo è dovuto al fatto che lo Stato spesso “dimentica” di pagare i suoi fornitori: lo scoperto nei confronti delle aziende fornitrici ammonta a una cifra oscillante fra 90 e i 130 miliardi di euro. Non è difficile immaginare che, in pochi mesi e malgrado le nuove tasse, il collasso di interi settori dell’economia interna causerà un rapido abbassamento degli incassi di imposte. Visto che non sembra possibile contrarre nuovi prestiti e che in Italia parlare di misure di austerità è una barzelletta, lo Stato italiano si troverà senza vie di uscita possibili e saranno necessarie nuove misure della BCE.
Essenzialmente, una forma di fallimento assistito e controllato. Ma, dati gli ordini di grandezza dell’economia e del debito pubblico italiani, ciò è semplicemente impossibile. In assenza di qualsiasi consenso politico riguardo ad una politica monetaria radicalmente diversa della BCE, il solo scenario realistico sarà quello di una rinegoziazione o di una ristrutturazione del debito, come suggerito da Nouriel Roubini in una precisa analisi pubblicata circa 18 mesi fa. Il collasso della finanza pubblica italiana sta avvicinandosi rapidamente ed avrà un enorme impatto sull’Eurozona e sulla UE."

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What If Stocks, Bonds and Housing All Go Down Together?

by Charles Hugh-Smith

About the claim that central banks will never let asset bubbles pop ever again--their track record of permanently inflating asset bubbles leaves much to be desired.

The problem with trying to solve all our structural problems by injecting "free money" liquidity into financial Elites is that all the money sloshing around seeks a high-yield home, and in doing so it inflates bubbles that inevitably pop with devastating consequences.

As noted yesterday, the Grand Narrative of the U.S. economy is a global empire that has substituted financialization for sustainable economic expansion. In shorthand, those people with access to near-zero-cost central bank-issued credit can take advantage of the many asset bubbles financialization inflates.

Those people who do not have capital or access to credit become poorer. That is the harsh reality of neofeudal, neocolonial financialization. Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012).

Injecting liquidity by creating credit and central bank cash out of thin air is not a helicopter drop of money into the economy--it is a flood of money delivered to the banks and financial elites. The elites at the top of the neofeudal financialization machine already have immense wealth, and so they have no purpose for all the credit gifted to them by the central banks except to speculate with it, chasing yields, carry trades and nascent bubbles (get in early and dump near the top).

Life is good for the kleptocratic financial Aristocracy: for debt-serfs, not so good.

No wonder the art market and super-luxury auto sales have both exploded higher. Thanks to the central banks' liquidity largesse, the supremely wealthy literally have so much money and credit they don't know what to do with it all.

If you want to borrow money to attend college, the government-controlled interest rate is 9%. If you want to speculate in the yen carry trade or buy 10,000 houses, the rate is near-zero or at worst, the rate of inflation (around 2% to 3%). If you want to borrow money for anything other than a socialized mortgage to buy a single-family home, tough luck, you don't qualify. But if you want to speculate with $10 billion--here's the cash, please please please take it off our soft central-banker hands.

If your speculations end badly, then no problem, we transfer the toxic trash heap of debt and phantom assets onto the balance sheet of the central bank or onto the public (government) ledger.

Given this reality, it was inevitable that the stock, bond and housing markets would all be inflated into bubbles by this monumental flood of free money. Please consider these three charts:



Spot The Bubble: Average New Home Price Soars By Most Ever In One Month To All Time High (Zero Hedge)

Verdict: bubble.

Verdict: bubble.

Japanese Bond Market Halted At Open As Bond Selling Purge Goes Global (Zero Hedge)

Verdict: bubble popping.

It is widely accepted as self-evident that all these bubbles will not pop because the central banks won't let them pop. That's nice, but if this were the case, then why did stocks crater in 2000-2001 and 2008-2009, and why did the housing bubble implode in 2008-2011? Did they change their minds for some reason?

No; they assured us right up to the moment of implosion that everything was fine, there was no bubble, etc. The only logical conclusion is that bubbles pop even though central banks resist the popping with all their might.

In the past, central banks were pleased to inflate one bubble at a time, enabling money both smart and dumb to flee one smoking ruin and get busy inflating the next bubble-ready asset class.

But now, thanks to essentially unlimited liquidity and credit, the central banks have inflated three bubbles at the same time: stocks, bonds and housing. That raises an interesting question: what if all these bubbles pop in unison? Will the central banks be able to place a bid under all three markets simultaneously? If so, where will all that freed-up cash go next?

One possibility is gold, another is commodities such as grain and oil. The latter is especially interesting, because central banks and governments hate energy speculators with special intensity because the "Brent vigilantes" have the power to boost inflation where it matters, i.e. energy.

Once energy takes off in a speculative bubble, the rising cost of energy sucker-punches the already-anemic global recovery, and the responsibility eventually lands on the laps of the central banks who created all the bubbles. Their quantitative easing policies discredited, the central banks will have to restrain their liquidity hand-outs, and that will undermine what's left of the various speculative bubbles they've blown.

Those who argue bubbles won't be allowed to pop ever again should look at history from 1999 to the present again.

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The Week Ahead: Should You Listen to the Fed Whisperers?

by Tom Aspray

The world markets had the widest ranges last week that we have seen in quite a while. An increase in volatility is often seen prior to a more extended correction. It was a plus that the major averages, especially the stock index futures, closed last week above the prior week’s lows.

Many of the averages did form daily key reversals on Wednesday, but they have short-term significance when not accompanied by other technical negatives. As I discussed a few weeks ago, a sharply lower weekly close is often the first sign that a top is being formed.

The German Dax closed the week down just over 1%, even though the country’s latest reading on business confidence was the best in several months. And though many of the US averages closed the week over 1% lower, the recent highs were confirmed by both the weekly and daily technical studies. This suggests that at worst, we are in the early phases of the top-building process.

The market’s problems started Wednesday, as the comparison of Ben Bernanke’s comments with the FOMC minutes that had just been released spooked investors. The concern that Fed’s bond-buying program might end earlier was the reason to sell.

The competition to outdo one another on the various financial networks is fierce, but I would recommend that investors not pay attention to these Fed whisperers. Keeping an eye on what the weekly and monthly market data will be much more illuminating, as major trend changes show up on the technical side well ahead of the fundamentals. For instance, the homebuilders completed their major head-and-shoulders top formation in 2006, well before the housing market collapsed.

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Global rates moved higher last week, but interestingly, the increases were the most pronounced in the bonds of the strongest countries, the US and Germany. The uptrends in the yields of the German ten-year Bunds and the US ten-year T-Notes (line a) shows a sharp increase since the start of May.

In contrast, the yields on the Italian ten-year bond have just risen slightly (line b). Rates on Greece’s ten-year are still basically in a downtrend (line c), but have fallen from the extremely high yields of a year ago.

Also, a gradual increase in rates is not always a negative for the stock market. It could encourage some bondholders to shift from bonds to stocks.

On Monday, I will be releasing a special report discussing my outlook for US rates. The recent increase in both long- and short-term yields has brought them to levels where they are close to completing weekly bottom formations. One should keep in mind that it would take much higher yields to reverse the major downtrend.

Over the past few weeks, in columns like Put the Odds in Your Favor Now, I have been advocating raising cash and taking profits. The percentage of cash in the Charts in Play Portfolio has increased significantly in the past two months.

The next few weeks are likely to be equally difficult as a fewer number of stocks will be able to go up significantly if the overall market does correct more sharply.

The Performance chart below shows that stocks have been the only game in town in 2013, as the SPY is up 15.6%, while bonds as represented by the iShares Barclays 20+ Year Treasury Bond (TLT) are down about 3.4%. Emerging markets, represented by Vanguard FTSE Emerging Markets ETF (VWO), have lost just over 4% so far this year.

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Of course, the Spyder Gold Trust (GLD) has been the real casualty, having lost over 17% so far this year. It is now retesting the lows from the middle of April. And silver has been getting even more press as prices have realty crashed.

Over the past two weeks, economic data has generally been quite good. The consumer sentiment data released on March 17 was much stronger than expected, as it jumped to 83.7, up from 76.4 the prior month.

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Last week, existing home sales and new home sales were both better than expected. Durable goods were also well above expectations. The data on manufacturing was also encouraging, as the flash PMI Manufacturing Index and the Kansas City Fed Manufacturing Index both reflected steady growth.

This week, we get a host of new data, which should help investors get a better reading on the economy. After the long weekend, we get the S&P Case-Shiller Housing Price Index and consumer confidence numbers on Tuesday. Also, we get more data on manufacturing from both the Richmond and Dallas Fed surveys.

The declining jobless claims have been a strong positive factor for the market, and we get the next reading on Thursday, along with the first revision of first-quarter GDP. Friday brings the personal income and outlays data, Chicago PMI, and the final monthly reading for May on consumer sentiment from the University of Michigan.

What to Watch
From May 14, prices accelerated to the upside until Wednesday’s reversal, which must have really punished some of the perennial bears who never thought the S&P 500 would get to even 1,600 or 1,625.

Friday’s close was mixed. The Dow finished up, while the S&P 500 and Nasdaq were down slightly. All were sharply lower in early trading, just like Thursday. The market’s resilience is impressive, and is a positive sign for next week’s trading.

They market’s outlook is still bullish, despite last week’s losses, and we still do not have firm sell signals from either the daily or weekly technical studies. On May 15, a total of 517 stocks made new highs on the NYSE, which is consistent with a positive major trend.

Though this was not mentioned in Thursday’s column, 3 Reasons to Avoid Panic Selling, it was another good reason to stick with your plan and the stops that you worked out before the reversal.

At Thursday’s low of 1,636, the S&P 500 was already 3% below Wednesday’s highs. I would not be surprised to see prices get back toward these highs in the next week or two, but given the nature of Wednesday’s reversal, they may not be exceeded.

Bullish sentiment of individual investors jumped again last week, according to AAII, as 49% are now bullish, up from 38.5% the previous week. Only 21% are bearish now, which is the lowest reading so far in 2013. This number will likely jump this week.

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