Monday, October 31, 2011


"And remember, where you have the concentration of power in a few hands, all too 

frequently men with the mentality of gangsters get control. History has proven that."

                                                                                                                             Lord Acton

"Respectable men and women content with the good and easy living are missing some of the most important things in life. Unless you give yourself to some great cause you haven"t even begun to live." 

                                              William P. Merrill


Why did the stocks markets close 4% higher for the week?  

Sometimes, when enough folks are positioned for the world to end rapidly, the mere suggestion that it might occur gradually is enough to energize the bidders.

In other words, bad news can be good news if you are expecting worse.  And stock markets are priced based on expectations of the future.

And expectations were extremely low going into Wednesday's EU leaders summit. 


Around 110 S&P 500 companies report earnings this week, both the ECB and FOMC make interest rate decisions and host press conferences -- the first for Mario Draghi in the case of the former -- and then oh by the way, the October employment report is released on Friday. Needless to say, each of these occurrences is capable of moving markets on their own. Taken cumulatively and coming on the heels of the surge in global equity markets, this could be a volatile week.

Yields on Italian debt continue to blow out, which is obviously a pretty ominous sign for the success fo the contagion-stemming measures announced last week.

And therefore it's not surprising that markets are selling off across the continent.

  • Italy -1.1%
  • France -1.4%
  • Germany -0.82%

It's the second day of selling since the talks concluded late last Wednesday. 

US futures are falling solidly as well.

YOU CAN COUNT ON THIS................

Where ever the next top is made, any hope of a "bull market" will finally be over.


"The danger to America is not Barack Obama, but a citizenry capable of entrusting an inexperienced man like him with the Presidency. It will be far easier to limit and undo the follies of an Obama presidency than to restore the necessary common sense and good judgment to a depraved electorate willing to have such a man as their president. The problem is much deeper and far more serious than Mr. Obama, who is a mere symptom of what ails America . Blaming the prince of the fools should not blind anyone to the vast confederacy of fools that made him their prince. The Republic can survive a Barack Obama. It is less likely to survive a multitude of fools such as those who elected him"

It Just Keeps Getting Worse In Italy, As The 10-

Year Yield Moves Higher And Higher...........

This is the #1 metric to watch all week: What direction Italian yields go?

At the moment, inexorably higher. Last week's EU summit, which prompted a huge "risk" rally has provided no help whatsoever on the anti-contagion front.

Italy's 10-year is now up to 6.07%.

The spread between it and Germany is obviously up as well today.

Now that the market has turned on Italy, it could also turn on France and Germany, which have relatively bigger off-balance-sheet liabilities.

The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail – even if last week's measures bring some short-term relief. There is minimal confidence that governments can turn this around. If investors believe the governments in Spain and Italy are bust, then Germany, France, and not forgetting the UK and US, are far, far worse.

Italy never 'enjoyed' a boom to suffer any bust. And on many measures, including reputable attempts to take account of off-balance sheet liabilities, Italian public sector debt fares well on cross-country comparisons (see chart below). These off-balance-sheet liabilities will now increasingly become visible to all. Who then will be really bust?


GOLDMAN: Stop Kidding Yourself, The Economy 

Is Weak And Got Worse In October.............

Goldman's own proprietary Goldman Sachs Analyst Index does not reflect the modest cheer that people are feeling about the economy.

Remember, this past week, Q3 GDP came in at 2.5%, nearly double the pace of the previous quarter. And the stock market has rebounded sharply thanks to a surprise string of stronger-than-expected economic data.

But don't get too excited.

From Goldman;

The GSAI fell 0.9 points from 43.3 in September to 42.4 in October. This is the third straight decline since July, and the second straight month that the headline index has registered below the 50 mark (a sub-50 reading implies that more analysts see contraction in their sectors than expansion). Consequently, the 3-month rolling average dipped below 50 to 45.8 for the first time since September 2009. Declines in the headline index contrast with the small improvement in the September ISM manufacturing report (see Exhibit 1) as well as other reports such as the Philadelphia Fed survey and today's third-quarter GDP release.



The Decade Wall Street Went Insane - the Zeroes 

The Decade Wall Street Went Insane - The Zeroes 1

The Decade Wall Street Went Insane - The Zeroes 2

The Decade Wall Street Went Insane - The Zeroes 3

FAILURE TO ADAPT............

It was always inevitable, on a finite planet, that there would be a limit to economic growth. Industrialisation has enabled us to rush headlong toward that limit over the past two centuries. Production has become ever more efficient, markets have become ever more global, and finally the paradigm of perpetual growth has reached the point of diminishing returns.  I HOPE YOU GET THIS!

Indeed, that point was actually reached by about 1970. Since then capital has not so much sought growth through increased production, but rather by extracting greater returns from relatively flat production levels. Hence globalisation, which moved production to low-waged areas, providing greater profit margins. Hence privatisation, which transfers revenue streams to investors that formerly went to national treasuries. Hence derivative and currency markets, which create the electronic illusion of economic growth, without actually producing anything in the real world.

For almost forty years, the capitalist system was kept going by these various mechanisms, none of which were productive in any real sense. And then in September 2008 this house of cards collapsed, all of a sudden, bringing the global financial system to its knees.

If one studies the collapse of civilisations, one learns that failure-to-adapt is fatal. Is our civilisation falling into that trap? We had two centuries of real growth, where the growth-dynamic of capitalism was in harmony with the reality of industrial growth. Then we had four decades of artificial growth – capitalism being sustained by a house of cards. And now, after the house of cards has collapsed, every effort is apparently being made to bring about 'a recovery' – of growth! 

It is very easy to get the impression that our civilisation is in the process of collapse, based on the failure-to-adapt principle.


It is just 12 years since we reached six billion and the growth is set to continue, to nine billion by 2050 it is estimated.

It is estimated that food production will need to rise by 50pc by 2030.

The challenges presented by such rapidly growing demands on the planet's water, energy resources and farmland are significant. 

Around one third of the world's people lived in cities but by 2025 it is forecast that 60pc will live in urban areas. 

The biggest implication of this growth is for infrastructure spending and the raw materials that make that kind of development possible. 


Sometime tomorrow, if the United Nations has done its sums right, the world's population will hit seven billion for the first time.



There is no other way to restore a healthy housing market than these actions:

1. Eliminate financialization by eliminating the Fed, the insolvent banks, the mortgage securitization racket and all the incentives for speculation, corruption and deception.

2. Clear the market by writing off all bad debt/mortgages and auctioning off all bank/lender assets in a transparent, free auction market.

3. Require 20% down payments and let interest rates rise to what private capital demands as fair compensation.

4. Encourage patient investing, not speculation.

5. Conserve resources to neighborhoods that are sustainable in eras of contracting tax revenues.

Unfortunately for future generations who might like to own a home whose price was set by the market rather than a Central State devoted to "saving" predatory banks and Wall Street's financialization machine, Wall Street and the banks are terrified of a healthy housing market, because an unfettered "price discovery" would doom their marked-to-Tinkerbell house of cards.




The EFSF is basically an empty box filled with promises of money - many of them from the very people who are most likely to need to borrow that same money. Should they need to borrow the money, they won't be able to make good on their promises so there will be less money for them to borrow. Now the brain trust running Europe have decided, in their collective wisdom, to apply leverage to the non-existent money in the empty box that they have yet to actually borrow, so it can backstop even more of the hundreds of billions of Euros of sovereign debt issued by countries whose finances are in such dire straits that they either require the kind of robust growth that is hardly likely to materialize any time soon or the forgiveness by the holders of that debt of a large part of it....Of course, granting Greece the package they did this past week, the Eurocrats have rather incredibly found yet another corner into which to back themselves. You can hardly champion the 'One Europe' manifesto on the one hand but then, as the next country lines up at the counter, declare "No soup for you!" - but that seems to be the 'plan' at this stage.


European summits in ivory towers

Paul De Grauwe

Imagine an army going to war. It has overwhelming firepower. The generals, however, announce that they actually hate the whole thing and that they will limit the shooting as much as possible. Some of the generals are so upset by the prospect of going to war that they resign from the army. The remaining generals then tell the enemy that the shooting will only be temporary, and that the army will go home as soon as possible. What is the likely outcome of this war? You guessed it. Utter defeat by the enemy.

The ECB has been behaving like these generals. When it announced its programme of government bond buying it made it known to the financial markets (the enemy) that it thoroughly dislikes it and that it will discontinue it as soon as possible. Some members of the Governing Council of the ECB resigned in disgust at the prospect of having to buy bad bonds. Like the army, the ECB has overwhelming (in fact unlimited) firepower but it made it clear that it is not prepared to use the full strength of its money-creating capacity. What is the likely outcome of such a programme? You guessed it. Defeat by the financial markets.

Financial markets knew that the ECB was not fully committed and that it would stop the programme. As a result, they knew that the stabilisation of the price of government bonds would only be temporary and that after the programme is discontinued prices would probably go down again. Few investors wanted to keep these bonds in their portfolios. As a result, government bonds continued to be sold, and the ECB was forced to buy a lot of them.

There is no sillier way to implement a bond purchase programme than the ECB way. By making it clear from the beginning that it does not trust its own programme, the ECB guaranteed its failure. By signalling that it distrusted the bonds it was buying, it also signalled to investors that they should distrust them too.

Surely once the ECB decided to buy government bonds, there was a better way to run the programme. The ECB should have announced that it was fully committed to using all its firepower to buy government bonds and that it would not allow the bond prices to drop below a given level. In doing so, it would create confidence. Investors know that the ECB has superior firepower, and when they get convinced that the ECB will not hesitate to use it, they will be holding on to their bonds. The beauty of this result is that the ECB won't have to buy many bonds.

Why has the ECB not been willing to use this obvious and cheaper strategy?

Part of the answer has to do with the objections that have been raised against the idea that the central bank should be a lender of last resort in the government bond markets of a monetary union. Some are serious (moral hazard); others are phony (inflation risk). The people sitting around the table in Frankfurt continue to believe that financial stability is not part of their core business, and, to use the words of Trichet, that there is only one needle on the Frankfurt compass and that is inflation. As long as this view prevails the ECB will be reluctant to do the obvious.

The result of this failure of the ECB to be a lender of last resort has been that a surrogate institution, the EFSF/ESM, had to be created that everybody knows will be ineffective. It has insufficient firepower and has an unworkable governance structure where each country keeps its veto power. In times of crisis it will be paralysed. As markets know this, its credibility will be weak.

To hide these shortcomings European leaders are now creating the fiction that by some clever leveraging trick the resources of the EFSF/ESM can be multiplied, allowing the ECB to retire to its Panglossian garden of inflation targeting. European leaders should know, however, that leverage creates risk, very large risks. These appear with full force when liquidity crises erupt. Thus when the leverage trick will be most needed, it will fail as it will show how risky the positions are of those who have guaranteed the leverage construction. 

Governments which now enjoy AAA creditworthiness will take the full blow of a 100% loss on their equity tranches and will lose their creditworthiness in one blow. The whole risky construction will collapse like other clever financial constructions of the recent past.

Academics have the reputation of living in an ivory tower far away from the realities of the world. My impression is that instead of the academics, it is the European leaders who have been living in an ivory tower. Disconnected from the economic and financial realities, they have created an institution that does not work and will never do so properly. Now they are creating a financial gimmick that, in their fantasies, they expect to solve the funding problems of major Eurozone countries. It is time for the European leaders to step back into the real world.

Europe's new debt crisis agreement: the good, the bad, the ugly


Sometimes I think the euro zone debt crisis is like watching a remake of the Bill Murray classic Groundhog Day, with the screenplay written by Financial Times correspondents. I wake up and read the news coming from Europe: worries mount about a Greek default, contagion spreads across the continent, the euro zone leaders are lost in befuddled bickering, and then a new pact to fix the problems emerges, hailed as historic. Then I get up the next day to find we're in exactly the same place we were before, with the cycle just repeating itself. Again and again. The only difference is that Groundhog Day made me laugh. The euro crisis version makes me want to cry.

So we find ourselves with yet another supposedly historic agreement, the one that will finally, really, once-and-for-all put an end the debt crisis, the most dangerous threat to global financial stability today. But is this really the big one? Or will I wake up tomorrow listening to the same euro zone version of "I Got You Babe," sung by Nicolas Sarkozy and Angela Merkel?

This latest pact, reached after all-night, hard-fought negotiations, is still very short on details and has a long way to go before it can be called actual policy. But looking at the general outlines, I see some good aspects, some bad, and some truly ugly.

First, the good. The euro zone is finally getting real. Its leaders had been in denial that far greater and more comprehensive measures were necessary to quell the crisis, but this agreement shows they're waking up to reality. Everyone knew Europe's banks needed to be repaired; now, finally, we have a plan to recapitalize them. Everyone knew Greece needed a more drastic debt restructuring; now we have a bigger bailout (130 billion euros, or $180 billion) with a bigger reduction of debt. Everyone knew the euro zone's bailout fund, the European Financial Stability Facility, or EFSF, was too small to fight contagion; now we have a deal to increase the fund's capabilities by using it to guarantee private bondholders against losses on sovereign debt purchases. These are all important – in fact, crucial – steps to tackling the debt crisis, and Europe's leaders should get kudos for taking them.

But then there's the bad: As has been the custom, the plan is ultimately no more than a politically determined collection of half-measures. With voters at home turning more and more sour on euro bailouts, the zone's leadership has attempted to tackle the crisis with hardly any new money being put on the table. And, as the saying goes, you get what you pay for. The bank recapitalization plan calls for banks to raise 106 billion euros ($150 billion) in fresh capital. But that's about half what private estimates say is necessary, so it's unlikely to be a final cure for Europe's banking woes. Nor is it clear what role European governments will play in providing that capital. 

On the expansion of the EFSF, the deal is aimed at giving the fund more firepower without adding any more ammunition. The actual size of the fund will remain the same; after the Greek bailout, no one is sure how much may actually be left. And as to that second bailout, Greece's situation will improve due to the 50% haircut being imposed on private bondholders. (Yes, imposed. Let's not kid ourselves that this debt restructuring is "voluntary." No one "voluntarily" loses half their money.) But Greece will still be stuck with a dangerously high debt burden. The new deal will lower its government debt to GDP ratio to a still-lofty 120% -- by the end of the decade. And even that estimate is based on unrealistic assumptions – that Greece can close its budget gap with its economy in free fall, or raise tens of billions in a privatization program that has yet to get off the ground. So my guess is that this deal resolves none of the major issues. The Greek debt crisis will continue; the banking crisis will continue; and Europe still hasn't put its money where its rhetoric is.

And now the ugly. The deal includes a proposal to tap China and other cash-rich emerging markets to participate in bolstering the EFSF, possibly through the IMF. French President Sarkozy is expected to phone Chinese President Hu Jintao to woo him into the scheme. This whole idea is truly pathetic. If I were Hu, I'd be insulted. The euro zone leaders are unwilling to spend more to solve their own debt crisis, so they think the Chinese are gullible enough to put in their savings? I don't think so. If Sarkozy called you up and asked for your paycheck to bailout Italy, would you give it to him? China is not a global ATM machine, or a charitable organization. In the end, China will invest its money as any other financier would – in ways that increase its return and preserve its wealth. Perhaps the Chinese can be bribed into cooperating – a notion has been floating about that Europe would promise Beijing more voting rights at the IMF. But even if China throws Europe a bone to boost its political influence in the region (or to gloat that the Europeans have come begging), the euro zone needs hundreds of billions of dollars, perhaps even trillions. They're not getting that from China.

So in the end, this historic agreement will likely get dumped in the dustbin of history like all of the other historic agreements. So the same cycle will repeat itself again. We'll probably be talking about a new grand agreement to halt the debt crisis by early next year. I guess it could be worse. I could be the groundhog.


Eurozone 'Collapsed', Euro to Vanish, FinansInvest CEO Says

The eurozone has "already collapsed" and is disappearing as the region is on the brink of a banking crisis that will destroy the currency, said Zafer Onat, the chief executive of FinansInvest, a Turkish broker owned by National Bank of Greece SA. (ETE)

"I believe that the European monetary union doesn't exist anymore," Onat said in an interview in Istanbul today. "I think it already collapsed but no one has said it yet. Now we are in a deadlock. One of the world's major reserve currencies will disappear."

The U.S. is unlikely to come to the eurozone's rescue and the euro's departure will benefit the dollar, which will be "very strong," Onat said. He blamed slow-moving European politics and an inability to act for Europe's debt crisis.

"Europe's problem all comes from doing nothing," he said. "They just sat and talked."

Turkey will be affected by a global downturn, "but it will be minimal compared to other countries", he said. "The global problem from too much leverage doesn't exist in Turkey," Onat said. "Turkey's average household is not leveraged at all; we are just starting to be."



A few days ago China telegraphed it refuses to continue to be seen as the world's rescuer and the dumbest money in the room. Many assumed China was only kidding: after all how would China let its biggest export partner flounder? And furthermore, all China does is provide vendor financing, right?  Well, as it turns out wrong.

As AFP reports, "China's state media Sunday warned that the country will not be a "savior" to Europe, as President Hu Jintao left for an official visit to the region including a G20 summit. Hu's visit has raised hopes that cash-rich China might make a firm commitment to the European bailout fund, but in a commentary, the official Xinhua news agency said Europe must address its own financial woes. "China can neither take up the role as a savior to the Europeans, nor provide a 'cure' for the European malaise. "Obviously, it is up to the European countries themselves to tackle their financial problems," it said, adding that China could only do so "within its capacity to help as a friend." A friend, who at this point is quite sensible, and realizes far better deals are to be had down the line if one merely waits.


SocGen Presents The New World Order............................ A MUST READ

SocGen Presents The New World Order

"We are all Greeks" - so begins one of the best reports on the unsustainability of the status quo, and on what "the new world order" will look like, created by SocGen's Veronique Riches-Flores. Her overarching observation: "No one can claim immunity from a Greek-style spiral" because "Our economies are mature, with weak potential GDP, especially post the financial crisis" and due to that old standby which everyone chooses so conveniently to forget, yet which is the biggest threat to the world's "welfare-state" stability, in existence since 1860 and which has been responsible for not only the longest period of peace in world history, but for the longest stealth plundering of middle-class wealth (there is indeed no such thing as a free lunch): "We are aging - we have no chance to see our future income improving substantially in the long run ; our savings capacities are shrinking and our health and pensions spending is increasing." That, in a nutshell, is it: the truth is there is increasingly less cash flow, coupled with increasingly more demands for cash.  WE HAVE IN NO WAY FACED THE TRUTH AND THE MARKET IS PRICED AT FANTASY LEVELS. SHORT TERM THINKING WILL CONTINUE TO RULE THE DAY UNTIL THE COMING COLLAPSE PUTS AN END TO THESE DELUSIONS AND MAKES US ALL FACE THE HARSH REALITIES WE ARE FACED WITH.

Unlike before, where growth could be masked by incremental new debt in either the public or private sector (that strawman which for decades allowed Keynesianism and its modern versions to flourish despite its fatal flaws), this time around, there is no more debt capacity dry powder. THE LIE IS EXPOSED!

In SocGen's words - 1) at 100% of OECD's GDP, even if the primary deficit disappeared as of today, it would still require three years to stabilize the debt ratio, and 2) the fiscal consolidation required - returning to 60% of GDP - would take a minimum of 10 years according to the OECD, 20 years according to the IMF. Here is where the report gets a slightly political twist, one which those GOPers capable of simple math, could easily use in their debates with democrats over the proper way of achieving fiscal stability: "of the 107 episodes of fiscal adjustments observed in the past 40 years the most efficient in terms of fiscal results and least costly in terms of growth have been the ones based on spending drag rather than tax increases."

And therein lies the rub: with the average age of the global developed world population older now than it has ever been in the history of the welfare state experiment, the last thing a politically unstable world can afford is to spring upon the population that there is simply "no more money." Or at least not in a world which does not want to experience the aftermath of hundreds of millions of formerly 'entitled' people suddenly realizing they have been lied to for decades and all those golden years were nothing but a lie. 

It gets worse:

Fiscal austerity efforts are more accessible when they are carried out in isolation (their depressive effects can be offset by growth in the rest of the world)

60% of the past episodes of adjustment lasted less than one year; none of them dealt with as many economies as are involved today.

At this point we read one of the scarier observations which SocGen reaches: "SG current economic scenario suggests that the public expenditures to GDP ratio could surge to 45% by 2015" Yes, that means that nearly half of global economic output will rely on the government/entitlement programs and vice versa. We leave it to the 'Austrians' in our audience to explain to everyone else what this means.

With no other way out, at least fiscally (the monetary discussion is a whole different topic, and one which will be a source of ever increasing tension both in the US and Europe, where as the most recent bailout demonstrated on one hand the ECB is demanding the creation of a fiscal union and the issuance of Eurobonds to remove "money printing" pressure from it, while the fiscal authorities will hear none of it and instead demand that the ECB print ever more in order to avoid blame when it all goes horribly wrong), the next step is a substantial cut in public investment. The social response will not be enjoyable.

But probably the most damning piece of evidence for the upheaval that is coming is not some recent revelation, but the conclusion from an S&P report published 5 years ago, that is before the GFC had even come to its predictable end. It represents the long-term forecast of sovereign debt ratings by Standard and Poors by decade, beginning in 2020 and going all the way through 2040. All we can say is: Canada better prepare to receive lots and lots of immigrants (and Europe, whose entire future is now reliant on the credit rating of the world's most complex structured credit instrument ever conceived, which in turn depends on the AAA-rating of constituent countries, is done).



One Way To Understand The EU's Inevitable Crash Landing: The Autopilot Analogy................ AN ABSOLUTE MUST READ

One Way To Understand The EU's Inevitable Crash Landing: The Autopilot Analogy  

The leaders of the EU don't actually know how to fly; they only know how to watch the financial sector's autopilot do its "magic." Too bad the autopilot shorted out last May.

Recent anecdotal evidence out of Asia suggests that the flight training received by some civilian airline pilots is based entirely on the aircraft's autopilot functions. Recall that an autopilot is a mechanical, electrical, or hydraulic system used to guide a vehicle without assistance from a human being. This deficiency in their training has been revealed in a most disconcerting fashion: when the aircraft's autopilot malfunctions, the pilots do not know how to actually fly the airplane.

In other words, pilots are not actually trained to fly aircraft, i.e. to know how the aircraft responds in real time to actual human intervention/control; they're trained to monitor and manage the autopilot system which does the actual flying.

This is a precise analogy for the European Union's leadership: they don't know how the financial system actually works, they only know how to follow the banking system's autopilot. Now that the financial system's autopilot has been fried, they are clueless and increasingly panicky: what does this lever do? Why is the stick so sluggish? We're losing power... there must be an auxiliary power switch, like in Star Trek... Good God, doesn't anyone know how to actually fly this thing?

Sadly, the answer is no. 

The EU leadership, just like that of the Federal Reserve and the U.S. government, only know how to blindly follow the system's autopilot program: increase leverage and debt, keep interest rates low so everyone (and every nation) with a pulse can increase their debt load, and let high-frequency trading (HFT) programs goose the stock market ever higher. TOTALLY UNSUSTAINABLE!

Nobody knows what to do once the autopilot fails. The EU's "pilots" are hoping that their oft-repeated "determination" to save their spinning-out-of-control economy will magically grant them the knowledge and skills to fly their craft through violent crosswinds and unprecedented storms. It won't; PR, spin and "meetings" can't teach anyone how to fly.

Here in the U.S., Fed chairman Ben Bernanke has studied the flying manual of 1929-era aircraft, and he is absolutely confident that this book learning will enable him to fly the overloaded, losing thrust 747 U.S. economy on manual. Needless to say, his confidence is tragi-comically misplaced; all he really knows how to do is blindly follow the financial system's autopilot: increase leverage and debt, keep interest rates low, goose the markets with intervention, money-printing and HFT, and repeat his "determination" to fly this plane like it's never been flown before, through typhoons and wind shear and whatever Nature throws at it, because, by gum, determination and the shorted-out autopilot will somehow keep the aircraft from buying the farm.

Unfortunately, determination has nothing to do with the end result of willful ignorance, complete  incompetence and supremely misplaced confidence, not to mention an abundance of absolute stupidity.

Which aircraft do you want to be on? The one with pilots who keep babbling about their "determination" to learn to fly in hastily convened cockpit meetings, or the one with pilots who actually know how to fly? The citizens of the EU, the U.S. and yes, China and Japan, too, will soon enough discover that determination doesn't give you an understanding of financial gravity or the experiential skills to fly through unprecedentedly challenging weather.


Another Bear Market Trap........................

Another Bear Market Trap


The sharp rally off the October 4th intraday low of the S&P 500 is a result of the assumed/ hoped for / prayed for / expected prospect of a real plan to save the Euro Zone and the European banks that have large holdings of sovereign debt, and slightly improved U.S. economic numbers indicating that the U.S. may not be in a recession right now.  In addition the market was probably oversold after its rapid plunge below the 1260-1370 trading zone. We think the market will soon be disappointed on both counts.

Our initial reading of the reports coming out of Europe does not exactly inspire a great deal of confidence.  On the surface it seems to be just another statement of intentions with all of the details to be worked out later---and, of course as the saying goes, "the devil is in the details".

The EU itself in its release calls the plan a "broad agreement" to increase bank reserves.  We would emphasize the word "broad." Banks would be recapitalized subject to the approval of a number of policies still to be determined.  It intends to broaden the rescue fund to a trillion Euros, ask Greek bondholders to take a "voluntary" haircut of at least 50% and force the banks to recapitalize by June 30th.  How all of this is going to happen remains unclear.  And the haircuts apply only to Greek debt. The hope is that the markets would gain enough confidence to ring-fence Spain and Italy from following in Greece's footsteps.  The markets have bought the story so far, but how long that feeling lasts is highly uncertain, particularly in view of the violent nature of recent trading. SHOW ME THE MONEY, NOT JUST MORE HOT AIR AND PROMISES! 

As for the U.S. economy, although we've seen a small recent bump following the summer debt-ceiling circus, the economy remains in the doldrums. Consumer confidence remains near all-time lows as a result of the weak labor market. Consumer spending has improved somewhat lately, but only because households lowered their savings rates. Personal income is still scraping along the bottom. Core capital goods expenditures were up, but surveys indicate the business investment may slow in coming months.  Confidence in the small business sector is still at historical lows. Recent unwanted inventory accumulation may also point to a coming slowdown in production. Housing is scraping along the bottom and may drop even more as the foreclosure backlog comes on to the market.

The economic sectors that have shown some recent improvement are generally coincident or lagging indicators while leading indicators appear to be showing some weakness. The ECRI Weekly Leading Indicator is at levels indicating a recession ahead. This indicator has a good record of predicting past recessions and has never forecast one that didn't occur.  If this prediction is accurate, we will be going into a recession in such a fragile economic environment that we would expect any recession to be severe. Some of the statistics are; 9.1% unemployment, 22% of homeowners underwater, about 5 million homes in inventory or shadow inventory, home prices continuing to decline, and debt (all sectors) at historically high levels. 

As we have pointed out numerous times in previous comments and special reports, the economy has a good reason to be weak. Household debt relative to GDP has exploded over the last couple of decades and consumers are now in the lengthy process of paying it down. That's why consumers are not spending and that's why businesses are not hiring.  The demand for goods and services is just not there.

In sum, we believe that the current rally will not last much longer and that the lows of 2009 will eventually be retested.  We shouldn't be surprised to see another "bear market trap" after the housing and stock market bubble (and the 100% move up from the oversold condition in March of 2009), all within the secular bear market that started in early 2000.  It seems that investors in U.S. equities will never learn from past experience, but we would now really be surprised if the market exceeded the early May peak of 1370 on the S&P 500. 


A look back at past bear markets and recessions going back more than 82 years.

Here are the details; 

• Generational bear markets, with losses exceeding 40% are the exception, not the norm. Since 1940, only one in four bear markets reached such a loss. 


• The 2000-02 bear market was so severe because of record overvaluation extremes at the start, and the washout of the high-tech bubble with a -78% loss in the Nasdaq (of which many of the largest stocks were also components of the S&P 500).

• Unweighted indexes declined only ~25% in the 2000-02 bear market;

• The 2007-09 bear market was extreme because the collapse suddenly exposed all of the mortgage derivatives on the balance sheets of major banks. The extent of this exposure was not well known — even to CEOs of the banks.

• Bear markets without recessions are more of a rarity. Since 1940, when they have occurred, the declines are usually milder. The 1987 Crash, with a loss of -34% was the exception; but '87 was triggered in a monetary climate where interest rates were soaring and the U.S. dollar was tumbling.

• Average valuation, as measured by the P/E ratio of the S&P 500 Index, at the start of all the bear markets exceeding 30% was 21.8. Today, the P/E ratio of the S&P equals 14.7.

Sunday, October 30, 2011


At this point in history the hearts of all humankind are besieged with difficulty and virtually  everyone is looking for some kind of hope. We tend to grasp at ideas or experiences that give us emotional lifts, even if they are not permanent or true. What we all need to fix our hearts on is Jesus Christ and His clear promises left to us in his word. 

Emotions and the trials and tribulations of this world are temporary. The promises of Scripture are real and the only hope worth having.  

Satan's darkest lies are always tied to God's most precious truths and he wants you to doubt, to fear, to try and overcome whatever it is your dealing with on your own. Satan will use every trick in the book to keep us from the truth, you should have no doubt about this.



God is faithful.

Perfect love casteth out fear.

Be still and know that I am God.  

Onward! for the battle is not yours but God's.

"And, lo, I am with you always, even unto the end of the world. Amen." 

                                                                                   Matthew 28:20

Do not fear; only believe! The LORD is with us; do not fear! Do not be afraid!

For God has not given us a spirit of fear and timidity, but of power, love, and self-discipline.

                                                                                                                      2 Timothy 1:7 

"And we know that in all things God works for the good of those who love him, who have been called according to his purpose." 

                                                                                                                                                                       Romans 8:28 

"Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God."
                                                                                                                                                                             Philippians 4:6

"'For I know the plans I have for you,' declares the LORD, 'plans to prosper you and not to harm you, plans to give you hope and a future.'" 
                                                                                                                                                                                     Jeremiah 29:11 

 Trust in the LORD with all your heart, and do not lean on your own understanding.  In all your ways acknowledge him, and he will direct thy paths.
                                                                                                                                                                                                    Proverbs 3:5-6

"For we wrestle not against flesh and blood but against principalities, against powers, against the rulers of the darkness of this world, against spiritual wickedness in high places." 

                                                                                                                                                                                                                                                    Eph. 6:12-13

The LORD is my shepherd; I shall not want. He maketh me to lie down in green pastures: he leadeth me beside the still waters. He restoreth my soul: he leadeth me in the paths of righteousness for his name's sake. Yea, though I walk through the valley of the shadow of death, I will fear no evil: for thou art with me; thy rod and thy staff they comfort me. Thou preparest a table before me in the presence of mine enemies: thou anointest my head with oil; my cup runneth over. Surely goodness and mercy shall follow me all the days of my life: and I will dwell in the house of the LORD for ever. 

                                                                                       Psalm 23 

Seek the LORD and his strength; seek his presence continually! 

When we are walking with God by faith, our circumstances may press in on us, but they cannot overcome us.

Suffering produces endurance, and endurance produces character, and character produces hope. 


Because you have made the LORD your dwelling place- the Most High, who is my refuge- no evil shall be allowed to befall you, no plague come near your tent. For he will command his angels concerning you to guard you in all your ways. 

Because he holds fast to me in love, I will deliver him; I will protect him, because he knows my name. When he calls to me, I will answer him; I will be with him in trouble; I will rescue him and honor him.  With long life I will satisfy him and show him my salvation.

Who forgives all your iniquity?

Who heals all your diseases?

Who redeems your life from the pit?

Who crowns you with steadfast love and mercy?

Restore us, O LORD God of hosts! Let your face shine, that we may be saved! It is impossible for God to lie. He has promised that all of our needs will be met, and we will be taken care of as long as we seek His Kingdom first.

We can do no good thing apart from God, and we can do all things through Christ who strengthens us. The words of Jesus shall stand even when heaven and earth have passed away. Kept by the power of God . . . that is the only safety.

I consider that the sufferings of this present time are not worth comparing with the glory about to be revealed to us. For the creation waits with eager longing for the revealing of the children of God; for the creation was subjected to futility, not of its own will but by the will of the one who subjected it, in hope that the creation itself will be set free from its bondage to decay and will obtain the freedom of the glory of the children of God. We know that the whole creation has been groaning in labor pains until now; and not only the creation, but we ourselves, who have the first fruits of the Spirit, groan inwardly while we wait for adoption, the redemption of our bodies. For in hope we were saved. Now hope that is seen is not hope. For who hopes for what is seen? But if we hope for what we do not see, we wait for it with patience.

Likewise the Spirit helps us in our weakness; for we do not know how to pray as we ought, but that very Spirit intercedes with sighs too deep for words. And God, who searches the heart, knows what is the mind of the Spirit, because the Spirit intercedes for the saints according to the will of God. 

We know that all things work together for good for those who love God, who are called according to his purpose. For those whom he foreknew he also predestined to be conformed to the image of his Son, in order that he might be the firstborn within a large family. And those whom he predestined he also called; and those whom he called he also justified; and those whom he justified he also glorified. 

                                                                                                         Romans 8:18-30 (NRSV) 

With my whole heart I cry; answer me, O LORD!

I call to you; save me. I rise before dawn and cry for help; I hope in your words.

Surely there is a future, and my hope will not be cut off. My only refuge is you lord.

O God, do not remain silent; do not turn a deaf ear, do not stand removed from me when I need you most.

See how your enemies growl, how your foes rear their heads and mock everything that is good. 

With cunning they conspire against your people; they plot against those you cherish. 

With my whole heart I cry to you lord, I trust in you to deliver me as you have promised. 

"Abba, Father, all things are possible for you. Remove this cup from me. 

Yet not what I will, but what you will."

Father, you said if any two of us would agree on earth as touching that anything we ask would be done for us by our Father which is in heaven.  Father, we agree and we bind in the name of Jesus and render harmless every negative word spoken against us and every negative thought anyone thinks against us.  We lose goodwill and positive attitudes toward us in the name of Jesus and we bind the spirit of doubt and the spirit of unbelief in our lives, our business, our friends and our loved ones.  We bind the evil forces in every realm of our lives.  We bind the fiery darts of the enemy - the spirit of poverty and hate.  We bind all powers and principalities and any living thing exalting itself against us and the kingdom of God.  We ask that no condemnation come upon us through an unforgiving spirit.  We bind and render harmless any unforgiveness anyone has toward us and we lose the spirit of forgiveness and love toward them.  We forgive them and we ask you Father to forgive and bless and the fullness of the Godhead bodily to operate in our lives, our business, our friends and our loved ones.  We ask Father that you confuse the wicked and keep him confused, and we lose your ministering angels to go forth and perfect that which concerns us now and in the time to come.  Now unto Him who is able to do exceedingly, abundantly above all that we ask or think according to the power that works in us.  AMEN


Fear God and keep his commandments, for this is the whole duty of man. The LORD is my light and my salvation; whom shall I fear? The LORD is the stronghold of my life; of whom shall I be afraid?

The fear of man lays a snare, but whoever trusts in the LORD is safe. Wait for the LORD; be strong, and let your heart take courage; wait for the LORD! 

Cast your burden on the LORD, and he will sustain you; he will never permit the righteous to be moved. For nothing will be impossible with God.  I can do all things through him who strengthens me. 

God hath all power in heaven and in earth. Who shall fight against the people who have such power vested in their Captain?

O angel of my God, be near, Amid the darkness hush my fear.

Do not fear; only believe! The LORD is with us; do not fear!

Despite all thy fears, be of good cheer, the Lord loveth thee.

Do not be afraid!

Nothing is impossible with God. 

If God be for us, who can be against us? 

All things are possible to him who believes.  

I can do all things through Christ who strengthens me. 
The power of God is at work in me and comes upon me.

With God all things are possible for me and for my ministry.
I shall finish the work He has appointed for me with His provision and His power. 

All the good things that God has promised and prepared for those who love Him are mine. 

If anyone would be first, he must be last of all and servant of all.

Commit your work to the Lord and then your plans will succeed.

                                                                                            Proverbs 16:3

Troubled Times

The discipline of dismay is an essential lesson which a disciple must learn.  When the darkness of dismay comes, endure until it is over, because out of it will come the ability to follow Jesus truly, which brings inexpressibly wonderful joy.

A man needs his God when his heart is melted within him because of heaviness. Be courageous, be not dispirited, wait humbly upon God, and he will surely come to your rescue. 

Do not be anxious about anything, but in everything by prayer and supplication with thanksgiving let your requests be made known to God.  And the peace of God, which surpasses all understanding, will guard your hearts and your minds in Christ Jesus.

When we are walking with God by faith, our circumstances may press in on us, but they cannot overcome us.  If you are struggling or fretting over your current situation, I pray you will turn it over to God right now, and share with Him what you are feeling, and put your request directly to Him.  Ask Him to grant you a peace that transcends human understanding.

Better is a handful of quietness than two hands full of toil and a striving after wind. It is a wonderful thing to know the assurance of a faithful God. 

Let not your heart be troubled . . . the Lord is here now, and the peace you receive is immediate.  I am poor and needy; hasten to me, O God! You are my help and my deliverer; O LORD, do not delay!

God's providential care, experienced during the testing of our life, produces a growing hope and confidence. It is most often true that we learn more of God's faithfulness in times of need than in times of plenty. 

Growing confidence in the Lord's provision and protection undergirds an anticipation for God's direction and wisdom.

Tribulation worketh patience. 

I lift up my eyes to the hills. From where does my help come?  My help comes from the LORD, who made heaven and earth.  He will not let your foot be moved; he who keeps you will not slumber.  Behold, he who keeps Israel will neither slumber nor sleep.  The LORD is your keeper; the LORD is your shade on your right hand.  The sun shall not strike you by day, nor the moon by night.  The LORD will keep you from all evil; he will keep your life.  The LORD will keep your going out and your coming in from this time forth and forevermore. 

                     Psalm 121


Therefore I tell you, whatever you ask in prayer, believe that you have received it, and it will be yours.

Those who trust in the LORD are like Mount Zion, which cannot be moved, but abides forever.  I lift up my eyes to the hills. From where does my help come?  My help comes from the LORD, who made heaven and earth. 

Peace I leave with you; my peace I give you. I do not give to you as the world gives. Do not let your hearts be troubled and do not be afraid.                                                                                                                              

                                      John 14:27 





ASK!      BELIEVE!       FEAR NOT!        

Make no mistake! God is capable of solving any problem we have.