Weekend Nov 16 2014
OF Two Minds nets the just in time rescue of the VIX each day last week. This is also keeping the RUT aloft.
And this is an interesting description of the Asian Model of expansion. Smith suggests it has run its course. Indeed this worked for Japan until 1989 and then China took up the model. China could prolong the facade given its central government and lack of transparency in markets.
The roots of the next disaster are explaind here. This is very much like the sub prime or dot.com market tops. In the dot.com top, money was invested in what turned out to be worthless common stock of companies that never made money. In the sub prime debacle money was borrowed in low cost dollars and invested, le verged 10x to one, in shaky mortgages. As Smith says, once the re payments shrink and the dollar strengthens, one cannot make the debt payments on the original loan and there is no hedge.
Here’s the risk in carry trades: if the currency you borrowed the money in strengthens and the currency you’re receiving the interest payments in weakens, the deal sours. The rise and fall in currencies can erase the profits of the carry trade.
Financial panics are typically caused by too much debt chasing 'investments' which cannot sustain the debt re payment.
Hre is another big leveraged bet, Russia may not be able to save the ruble. Putin bet long on $100 oil. That was a bad bet.
1. So first we have the carry trade Smtih describes above.
2. Elliott Wave notes that Hedge Fund leverage is back to 22007 levels.
3. Now the student loan default rate loosk a lot like the sub prime mortgage default rate.
And talk about generous, did you know that
by law, the U.S. Department of Education considers a borrower to be in default when he fails to make on-time repayment of his loans for nine consecutive months.
Nine months, an entire school year before we notice default, if that is the case how many more are lined up 4-5-6 months in default?
A derivative industry to student loans is the ever expansive HIgher Ed 'industry.' Here in Texas every state school wants more tuition revenue bonds to construct more buildings. But 21.6 million young adults are living back in their high school bedrooms, and one third of these are college grads.
So we have essentially the same sort of default going here. Loans are made to sustain the voracious Higher Ed super structure of ever higher tuition. But the bet is not paying off, too many are right back at home without a job to sustain the debt re payment. Yet Higher Ed continues to double down on more debt from student loans to Pell Grants to tuition revenue bonds.
For example the state of Texas is in great shape when oil is $100. Texas collects severance tax on the oil produced. High oil prices produce high tax revenue, ditto for high sales taxes in booming areas. Yet with oil down $30 I don't see any University cutting back on its demands for more state money. Once again we have the Higher Ed Coyote running off the cliff chasing the Roadrunner promise that a College Education always pays off.
And there readers you have the roots of the next melt down.
The Dollar and Crude Oil
Readers might want to fortify themselves with a cup of coffee and spend some serious time studying the above chart. The long slide in the US Dollar has ended. As both Ch Smith and Bob Prechter predicted, the world is now rushing to dollars, not gold. Three of trhe MAs have clustered on the Dollar, which typically precedes a new move in another direction. In teh lower panel crude oil has broken its 50 month MA for the first time since the 2009 recovery. Monthly charts are notoriously slow moving, so this is quite significath. Notice there was realy only one break of the 50 month MA since oil began rising in YUear 2000.
This flies in the face of numerous assurances that there will be a soft landing for oil prices. See my next post which is this week's news paper column.
Dollar and the Commodity Research Bureau Index
If anything the breakdown here is worse. This is what Smith is describing, money borrowed to finance things is finding less and less collateral to secure the loan. The prices of things are dropping.
Stocks and Momentum
CAn Janet Yellen and her elves stretch this to Christmas? The SPX in green and the momentum, percent of stocks up, is in red black. We are just about to roll over again. The bounce back sure smacks of intervention to me.
NDX and Rate of Change
THe Rate of Change at bottom has not reached the violent proportions of Year 2000. On the other hand it has exceed Year 2007! This run up has to have been the result of the leverage described in the opening links. Hedge funds have borrowed enormous amounts of cheap FED money to chase the stock market rather than hire someone to work at Sears.
NYSE Index
The angle of the advance now is the same as in 2007. And it is about as far above the MAs.
Looks to me like this is alreayd resembling the top of 2007.
In two weeks 23 art pieces fetched $20 M each.
BID
Sy why is Sotheby's trading lower in price? Is this a significant divergence?
Where is the top, it wil of coruse be obvious once it occurs.
Bonds
I suspect bond prices are turning up here. TLT needs to vault the 25 day MA.
The Bottom Line
I follow several letters of successful timers. This middle to late November time frame in on the radar screen for several of them. And we are certainly in the time frame of the 40th Anniversary of the Dow low of December 1974 at Dow Industrial 577.
Seriously can you imagine that was the case in many of our lifetimes? This is how Buffet made so much money, he as early to the party. Now he buys entire companies and literally captures the cash flow, it is his money.
Bonds are re gaining momentum which also suggests weaker stocks.
Look back at the Dollar versus Oil Graph, the price of oil has just now begun falling below its longer term MA. Yet a headline reprinted from the Houston Chronicle today reads
Oil Price Increase Migfht Just TAke a While
This is simply ludicrous. It implies that the bottom in prices has already b een seen. Yet the decline in oil versus the increase in the Dollar, longer term, is just now beginning. Granted we could see a re test of the break out with oil rising to the monthly MA again, but I suspect that will just become a failed test.
The parabolic rise in the NDX and NYSE argue for some sort of top in this anniversary period.
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Social Mood
Google this phrase
Awkward at the China Summit
Now notice how many stories come up. World leaders are unsure of one another, there is not reassuring confidence. China is perhaps the only player confident in what they are doing. Russia is beginning to act out of desperation. The Russain Central Bank has raised rates to 9.5% to attempt ot halt the falling ruble.
Meanwhile in the USA, the President doubles down on is detmination to unilaterlly pass everything, his policies as he put it, rejected on the ballot in this election.
My point being that negative emotion is taking Center Stage. And it is world wide.
This will eventually be felt in many more markets.
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