Too Calm: Strength or Seduction June 15, 2012
Doug Wakefield
Isn’t
it nice to have someone bigger than you to look out for your investments? You
know, someone who no matter what happens in the world is always “buying the
dip”; someone who is totally unphased by the events taking place in Europe,
China, Japan, the US or any place on the globe. Certainly, this is a sign of great strength and faith in the
Almighty Dow.
If
you are reading this article, I know you, like myself, try to stay informed. In
many ways, your life is somewhat like my own. I have a wife, three sons and run
a small business in America. I do not
decide the fate of hundreds of millions of people in Europe, nor influence
millions of traders in our capital markets solely by saying the word
“liquidity”. However, I do read every day, and look for major developments in
the world that could impact our capital markets. I also have and continue to
read books written years, decades, of even more than a century before we
arrived at 2012 in order to understand the incredible period of history that is
unfolding around me.
With
this in mind, let me share with you a few items I have read in the last 2
weeks, which reflect trends that have been accelerating for a year or more. As
you read each of these, whether you are managing billions, leading a
corporation, or retired and concerned about your nest egg, do these events
support a Dow that at the close of business today, Friday, June 15, has climbed
732 points in the last 10 trading days, or stands only 4.2% lower than its 38
month high attained on May 1st.
Is this a sign of the strength of stocks in America, or the seduction
created by traders always waiting for the next expansion of power by central
bankers as they ride to the rescue?
Liquidity
Bailout From Central Banks If Greek Elections Wreak Market Havoc, Report Says,
Forbes, June 14, 2012
Greece
EC
Preparing Secret Plans for Greek Euro Exit, UK Telegraph, June 12, 2012
Commission officials confirmed on Tuesday that
"these elements" of contingency planning for a Greek exit from the
single currency have been discussed by the "euro working group" (EWG)
of Treasury officials and junior finance ministers over the last six weeks….
Greek newspaper Ekathimerini reported bank
withdrawals in Greece have hit a rate of up to €500m per day, a level expected
to accelerate in the aftermath of Greek elections on Sunday (June 17)….
Capital restrictions, including limits on
cash-machine withdrawals, are legal under Article 65 of Europe's internal
market rules allowing emergency measures to preserve "public
security" in the event of a Greek exit, said a Commission official.
Egypt
Muslim Cleric:
Jerusalem to be Capital under Mursi Rule, Israeli National News, June 9,
2012
If
Muslim Brotherhood candidate Mohammed Mursi were to become president, Egypt’s
capital would no longer be Cairo, but would be Jerusalem, a prominent Egyptian
cleric said at a presidential campaign rally, which was aired by an Egyptian
private television channel.
“Our
capital shall not be Cairo, Mecca or Medina. It shall be Jerusalem with God’s
will. Our chants shall be: ‘millions of martyrs will march towards Jerusalem,’”
Safwat Hagazy said, according to the video aired by Egypt’s religious Annas
TV.
The
video, which went viral after being posted on YouTube, was translated into
English by The Middle East Media Research Institute (MEMRI).
“The United States of the Arabs will be restored on
the hands of that man [Mursi] and his supporters. The capital of the [Muslim]
Caliphate will be Jerusalem with God’s will,” Hegazy said, as the crowds
cheered, waving Egyptian and Hamas flags….
Mursi will challenge Egypt’s former Prime Minister
Ahmed Shafiq in the upcoming runoff elections, scheduled to take place June 16
and 17.
Spain
Spain’s Bond Yield Hits A Record Near 7% After Moody’s Downgrade to Near Junk Status, The Washington Post, June 14 ‘12
Spain’s
borrowing costs broke through another record Thursday after a credit ratings agency
downgraded the country’s ability to pay down its debt amid rising fears a bank
bailout may not be enough to save the country from economic chaos.
The
interest rate — or yield — on the country’s benchmark 10-year bonds rose to a
record 6.96 percent in intraday trading Thursday, its highest level since Spain
joined the euro in 1999 and close to the level which many analysts believe is
unsustainable in the long term.
The
ratings agency Moody’s downgraded Spain’s sovereign debt three notches from A3
to Baa3 Wednesday night, leaving it just one grade above “junk status”.
Moody’s
said the downgrade was due to the offer from eurozone leaders of up to €100
billion ($125 billion) to Spain to prop up its failing banking sector, which
the ratings agency believes will add considerably to the government’s debt
burden….
Spain
won’t immediately collapse if the rate hits 7 percent, but reaching that point
would affect it at Tuesday’s (June19) scheduled debt auction.
“The
clock is definitely ticking,” said Michael Hewson, an analyst with CMC Markets.
Japan
Russia
Stunned After Japanese Plan To Evacuate 40 Million Revealed, EU Times,
April 15 ‘12
A new report circulating in the Kremlin today prepared by the Foreign Ministry on the planned re-opening of talks with Japan over the disputed Kuril Islands during the next fortnight states that Russian diplomats were “stunned” after being told by their Japanese counterparts that upwards of 40 million of their peoples were in “extreme danger” of life threatening radiation poisoning and could very well likely be faced with forced evacuations away from their countries eastern most located cities… including the world’s largest one, Tokyo….
Important to note,
this report continues, are that Japanese diplomats told their Russian
counterparts that they were, also, “seriously considering” an offer by China to
relocate tens of millions of their citizens to the Chinese mainland to inhabit
what are called the “ghost cities,” built for reasons still unknown and
described, in part, by London’s Daily Mail News Service in their 18 December
2010 article titled: “The Ghost Towns Of China: Amazing Satellite Images Show Cities
Meant To Be Home To Millions Lying Deserted”….
If
this last one sounds too unbelievable to fathom, as it certainly does to me,
you may want to consider the comments of Senator Robert Wyden who visited
Fukushima in April, or the comments of the Japanese Prime Minister Naoto Kan
who spoke at the World Economic Forum in January, as found in the April 27,
2012 Huffington Post article, Two
Meltdowns: Fukushima and the US Economy.
Moving
past these extraordinary world events, we go to statements made by global
political/financial names. Robert Zoellick, President of the World Bank, and
Roger Altman, Chairman of Evercore Partners, former deputy Treasury secretary
under Clinton (93-94) – both attendees
of the May 31-June 2 Bilderberg meeting in Chantilly, Virginia two weeks ago - had comments in the news last week.
Robert Zoellick
‘Beware
of the rerun of the Great Panic of 2008’: Head of World Bank Warns Europe is
Heading for ‘Danger Zone’ as World Markets Suffer Bleakest Day of the Year So
Far, UK Daily Mail, June 1, 2012
The head of the World Bank yesterday warned that
financial markets face a rerun of the Great Panic of 2008.
On the bleakest day for the global economy this
year, Robert Zoellick said crisis-torn Europe was heading for the ‘danger
zone’.
Mr Zoellick, who stands down at the end of the
month after five years in charge of the watchdog, said it was ‘far from clear
that eurozone leaders have steeled themselves’ for the looming
catastrophe amid fears of a Greek exit from the single currency and meltdown in
Spain.
The flow of money into so-called ‘safe havens’ such
as UK, German and US government debt turned into a stampede yesterday…..
He said: ‘Events in Greece could trigger financial
fright in Spain, Italy and across the eurozone. The summer of 2012 offers an
eerie echo of 2008.
‘If Greece leaves the eurozone, the contagion is
impossible to predict, just as Lehman had unexpected consequences.’…
Roger Altman
Euro
Zone on the Brink, Washington Post, June 4 ‘12
Europe
is on the verge of financial chaos. Global capital markets, now the most
powerful force on earth, are rapidly losing confidence in the financial
coherence of the 17-nation euro zone. A market implosion there, like that
triggered by Lehman Brothers collapse in 2008, may not be far off. Not only
would that dismantle the euro zone, but it could also usher in another global
economic slump: in effect, a second leg of the Great Recession, analogous to
that of 1937.
This
risk is evident in the structure of global interest rates. At one level, U.S.
Treasury bonds are now carrying the lowest yields in history, as gigantic sums
of money seek a safe haven from this crisis. At another level, the weaker
euro-zone countries, such as Spain and Italy, are paying stratospheric rates
because investors are increasingly questioning their solvency. And there’s
Greece, whose even higher rates signify its bankrupt condition. In addition,
larger businesses and wealthy individuals are moving all of their cash and
securities out of banks in these weakening countries. This undermines their
financial systems.
Even the Federal Reserve, whose ability to produce debt worldwide has
placed it at the top of the central bankers class over the last century,
released two reports this year, one this week, that were not exactly
“optimistic”. In my opinion, one would have thought this information should
have given traders pause before catching the next “central banks to the rescue”
wave higher, or institutional managers conviction that maybe they should sell a
few shares of those 6 Dow stocks that hit their all time highs (one actually
since 2000) this week as options as June options closed.
Changes
to Family in U.S. Family Finances from 2007-2010: Evidence from the Consumer
Finances, Federal Reserve Bulletin, June 2012, Vo 98, no 2
The Federal Reserve Board’s Survey of Consumer
Finances (SCF) for 2010 provides insights into changes in family income and net
worth since the 2007 survey. The survey shows that over the 2007-2010 period,
the median income of real (inflation-adjusted) family income before taxes fell
7.7%, median income had also fallen slightly in the previous three year period.
The decline in median income was widespread across demographic groups, with
only a few groups experiencing stable or rising incomes….
The decreases in family income over the 2007-2010
period were substantially smaller than the declines in both median and mean net
worth; overall median net worth fell 38.8% and the mean fell 14.7%…Although
declines in the values of financial assets or business were important factors
for some families, the decreases in median net worth appear to have been driven
most strongly by a board collapse in housing prices. …
Don’t
Expect Consumer Spending to Be The Engine it Once Was, The Regional Economist,
Federal Reserve Bank of St. Louis, January 2012
Can American consumers continue to serve as the
engine of U.S. and global economic growth as they did during recent decades?
Several powerful trends suggest not, at least for a while. Instead, new sources
of demand, both domestic and foreign, are needed if we are to maintain healthy
rates of growth.
Unfortunately, this won’t be easy because consumer
spending constitutes the largest part of our economy, and replacements for
it—more investment, more government spending or more exports—either can’t be
increased rapidly or might create unwanted consequences of their own.
Finally, when one searches for articles about “money pouring in”, the
collective actions of retail investors and corporate insiders in the last few
months does not confirm that the crowd, either in or out of the know, was the
power behind these 100 plus daily swings that
gave the Dow the image of invincibility.
Insiders are
Selling, Should You?, CNN Money, April 24, 2012
First quarter earnings have been decent, if not
spectacular. And many corporate executives are issuing cautiously optimistic
guidance for the rest of the year.
But while insiders' lips are saying one thing,
their wallets are saying another. The level of insider selling among S&P
500 (SPX)
companies is the highest in nearly 10 years. That is not good.
Guess
Who is Buying all the Bonds? (It’s Not the Feds), CNBC, June 8, 2012
Mom-and-pop
investors, and not the Federal Reserve, have been the ones most responsible for
driving the mad dash to government debt, according to newly released data.
But despite the low
yields, it's been retail investors most responsible for the recent move plunge.
The demand among
average investors has swelled so much, in fact, that they bought more
Treasuries in the first quarter than foreigners and the Fed combined.
Households picked up about
$170 billion in the low-yielding government debt during the quarter, while
foreigners increased their holdings by $110 billion.
US
Flash Crash Measures Suffer Delays, Financial Times, May 6 ‘12
Volume of trading off-exchange has grown since the flash
crash, hitting a record level in the first quarter, at 34 per cent.
Critics have charged that worries about the flash crash, and
the role played by automated trading “algorithms” and high-frequency dealing
have chased individual investors away from equities.
Since May 6 two years ago, retail investors have pulled
$273bn from US domestic equity mutual funds, versus $174bn in the two years
prior to the “flash crash”, according to figures from the Investment Company
Institute.
The average daily trading volume of US equities was
also its lowest in April since December 2007.
So let’s review. From reading a few articles from papers around the
world, listening to the comments from two recent Bilderberg attendees,
examining two powerful pieces by the Federal Reserve that support the
deflationary headwinds the US and global economy is facing, and examining the
actions of retail investors and insiders, I ask you, “Is the current market
rally a display of strength, fearlessness, and confidence, or the seduction and
enticement to believe that U.S. stocks
can overcome any pieces of bad news”?
When I began Best Minds Inc in early 2005, and started
releasing public articles that summer at the top of the Philly Housing
Index (HGX), it was clear from the massive explosion of debt underneath, and
the research showing the hysteria to get in, and the distortion of prices back
over centuries, that this was a turning point in history, not just a market
top.
When I arrived at the top of the American and Chinese markets in late
October/early November 2007, having been influenced by men and women who were
examining history and seeking to be realists, not bearish for bearishness sake,
I released an article, Fear and
Perception. It was especially obvious I was watching a mania in the Chinese
equity markets, which like the American real estate bubble two years earlier,
would be a turning point in history, not just a trading top.
[Chart
from Fear and Perception, released on Nov 1 ‘07]
So how do US
stock markets stay removed from these extremely negative world events even now?
It this a mania like the other two cited above, or is this one somehow
different?
The answer is
simple. It is the same, and yet different. The current environment contains instant
money “newly created debt” by central bankers, only at levels never seen before
in history, the ability for computers to trade in milliseconds, giving the
illusion of a crowd leaping into stocks when in reality smaller sums of capital
are being used to purchase futures which provide the leverage without the need
for the cash to purchase an index ETF or stock, and America’s denial to believe
that our corner of the world could face changes as serious as those living in
other corners of the world. However, I believe the combination of “unlimited
money”, the fastest trading in human history, and the ability to choose the
version of the news you wish to hear, has created what is right now, the most
powerful mania of all time. However, would it not make sense that if “wealth”
can be created in seconds, it could also be destroyed as quickly?
High
Speed Trading: Profits – and Danger – in Milliseconds, CNBC, May 14 ‘12
Eric
Scott Hunsader has gone completely down the rabbit hole, and he doesn’t like
what he’s finding there.
Hunsader is the CEO of a Chicago-based market
analytics firm that specializes in high-frequency trading — super
fast trades executed at the speed of light that can alter asset prices faster
than human beings can react to the changes.
Based on his own analysis, Hunsader has come to a
startling conclusion: Markets today are even more susceptible to sudden failure
than they were two years ago during the “flash crash,”(May 6 ’10) which brought
the stock market down by about 1,000 points in mere minutes.
That’s because a new breed of trader armed with
hundreds of millions of dollars to deploy is trading so fast—and with such
spikes in volume—that he can dry up liquidity in an instant, causing
severe price swings….
On May 4, Hunsader says, he spotted those traders
just before the April number was released. At 8:29:20 and about 200
milliseconds, he says, someone — he has no way of knowing who — executed a
trade in the five year T-note futures market worth about $150 million.
A chart of that single second in the market shows
that prices are relatively stable until the trade. And just after that, for the
rest of the second, prices spike, and gyrate up and down as other automated
high speed computers react to the trade.
Hunsader says he doesn’t know exactly how the
traders make money off the volatility that they create, but he suspects they’re
making other trades in the milliseconds following their market moving trade
that take advantage of the relationships between this market and others that
are impacted by it.
The traders that move first, and fastest, win, he
says.
“It’s
like two guys running in the woods, and they see a bear and one guy drops down
and puts his shoes on and the other guy says, ‘what are you doing that for, you
can’t outrun a bear,’” Hunsader says. “And the guy goes, ‘I don’t have to
outrun the bear, I just have to outrun you.’” [Italics mine. See also my Oct
2011 article, Darwin’s Deceptive and Dangerous Devices).
In the next few weeks, the most powerful financial leaders of the
world will meet at various places for meetings that were arranged weeks, if not
months ahead. It is so easy to believe that “more liquidity” will always be
fired from the cannons of the central bankers, and that as we learned from
2008, they can stop a decline. Yet, if we all reflect on world events just 4
years ago, we know this is not true.
I am confident, that someday, future generations around the world will
understand that we sold our futures to a small group of people who would give
us the illusion we were strong and powerful today, or that their actions would
leave our corner of the world unimpacted by those facing monumental challenges
in other corners of the world. At some
point, we will all desire friendships based on the openness and transparency to
discuss information like that contained in this article realizing that we are
all watching the same world changes, rather than posturing with people who help
us forget about reality for the sake of our own desire to feel
comfortable…today. Success is still achievable. We just may need to redefine
how it is done.
“It is obvious: the future is open to manipulation.
Who will do the manipulating? Will it be the new elite on the side of an
establishment authoritarianism or another elite? Whoever achieves political or
cultural power in the future will have at his disposal techniques of
manipulation that no totalitarian ruler in the past has ever had. None of these
are only future; they all exist today waiting to be used by the manipulators….
I hate being an alarmist, and I do not
think I am. Anything I have said that is alarmism I hope you will simply
forget.” [The Church at the End of the Twentieth Century (1970), Francis
A. Schaeffer, pg 78 & 86]
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Doug Wakefield
President
HUBest Minds Inc.UH, a Registered Investment Advisor
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sell short. The safest action is to constantly increase one's knowledge of the
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a thorough examination of how that "wisdom" has stood over time, is
to take unnecessary risk. Best Minds, Inc. seeks advice from a wide variety of
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