Monday, January 11, 2016


Another sharp downturn for bourses in Asia this morning is setting up markets for yet another tough day ahead. 


One week down.  Fifty-one more to go.  No doubt, this has been a wild start to the New Year.

Investors had been hoping that the investment Shangri-La would continue for another year?

We ended 2015 in a very choppy fashion, down a little for the year, since the year end the Chinese market is down 14%, the S&P down 6% and most global markets down 6-10%.

The U.S. stock market has entered correction territory which is defined by a drop of 10% from its old high. All three major stock indexes fell to three month lows in heavy trading. The next downside target is the two lows formed in August and late September.

What the indexes do from there will determine whether the current downturn is just a correction or something more serious. Unfortunately, some portions of the market have already broken those support levels.

Foreign stocks both developed and emerging have already fallen to 52-week lows. That doesn't bode well for U.S. stocks which are now in the riskiest position since the bull market started seven years ago.

The risks that one day will bring the world economy down have been with us for quite a few years. Fundamentals today are considerably worse than at the beginning of the Great Depression.

Bernanke during his 8 years doubled US debt from $8 trillion to over $17 trillion. It took the US government over 100 years to go from zero to $6 trillion, a feat that Bernanke managed in a fraction (3/100th ) of the time.

Global debt in the mid-1990s was around $20 trillion and today it is $225 trillion. This is an incredible 10 times increase in world debt in 20 years. And just since 2008, global debt has increased by 50%. 

It should be clear to most observers that this exponential growth in credit will not have a good ending.

Workers' wages in the US adjusted for inflation are half the level they were in 1973. Real sales per share of S&P companies, adjusted for inflation and share buybacks, are down 30% since 2008. Thus the current boom in stocks does not rest on a sound foundation but rather on financial engineering.

We are constanly being misled by manufactured and manipulated government information in a world of financial repression. It is of course possible to fool most of us most of the time, but at some point in the not too distant future, financial markets will tell us the truth. This will be when stocks and bonds crash together with most currencies, led by the dollar.

The coming implosion will be of equal magnitude to the credit creation we have seen in the last few decades. We will see asset and credit markets losing trillions of dollars at a minimum in coming years. There are many resemblances with the end of the Roman empire. The excesses and moral decadence we are now seeing in the world certainly point to the end of a major era. 

What is absolutely clear is that the risks in the world are now greater than ever in history.

Bubbles are ubiquitous and present in Japan, China, most parts of Asia, Saudi Arabia and the Middle East, Russia, Europe, Brazil and many countries in South America as well as North America. The world has never before in history had a global bubble of this magnitude.

We also have many political and geopolitical problems around the world. Most of the countries mentioned above will experience social unrest due to the coming economic downturn. The migration in Europe will also give rise to many problems. Another major risk is the potential of war and even nuclear war in the Middle East and also between the US and Russia. A conflict between the US and China in regard to the South China Sea is also a real possibility. The risk of a major conflict is now greater than at any time since WWII. The world is minefield of economic and political risk and as one mine goes off, the likelihood of a massive global domino effect is substantial.

Global Central Banks Are Facing a Crisis Larger Than 2008... And With Little to No Fire Power Left!

What's coming will not be another 2008. It will be far worse. There is over $20 trillion more debt in the financial system than there was in 2008. If 2008 was a debt bubble that needed to burst; today the bubble is even larger.

Today, Central Bank balance sheets are already bloated to the point of being larger than even some of the larger countries' economies. The Fed's balance sheet is over $4.5 trillion, larger than the economy of Germany and just smaller than the economy of Japan. The ECB's balance sheet is €2.7 trillion, larger than the economies of France or Brazil.  The Bank of Japan's balance sheet is over $3 trillion, larger than the economy of the UK.

In 2008, Central Bank balance sheets had ample room to grow. Today, investors have already seen what a 200% or 300% expansion of a Central Bank's balance sheet can buy. In short, Central Banks are in far worse shape than they were in 2008 to deal with another crisis. The coming crisis will be significantly larger than that of 2008.

A world gone mad is precisely what we have today: A Dow that bows to China's stock market crashes. A government baffled by the whims of ISIS terrorists. Big oil stocks beaten to a pulp by Saudi Arabia and the worst price collapse of the century. A stock market that ended the year flat-lined; stock volatility that makes your head spin; and stock market dangers that keep you up at night. Truly frightening times.

The recent jobs report came in better than expected but didn't move the markets in the right direction on Friday. From an investment standpoint, this is a problem. When markets don't react to good news, they're probably even weaker than they seem. The real news flash in the December "jobs" report, therefore, is that even by the lights of the BLS' rickety, archaic and virtually worthless establishment survey, the domestic economy is dead in the water. We are not on the verge of "escape velocity", as our foolish monetary politburo keeps insisting; the US economy is actually knocking on the door of recession.

The retail sheep have been led to the slaughter once again in the Wall Street casino. The cats who run it have embraced the nonfarm payroll report as the primo macroeconomic indicator because they know that it drastically lags the real drivers of main street activity and has an abysmal record of forecasting turns in the macroeconomic cycle.

Stated differently, these fictional monthly jobs numbers are extremely useful to the Wall Street sell side. They keep the rubes hitting the "buy" button until the fast money can slowly dump its holdings and get out of Dodge; or even pivot and reload to the short side. It is plain as day that the BLS' seasonal adjustments are a completely stupid waste of time. During the winter season especially, it might as well just use a random numbers generator.

The December jobs report was not evidence of a "strong" economy. It was just another emission from the government's noise factory that obscures the actual state of the main street economy.

So what is actually happening beneath the surface is a great swap out. The very highest productivity jobs in goods production are disappearing on a trend basis; the monthly deltas reported so breathlessly on bubble vision actually embody purely "born again" employment slots that represent the partial recovery of jobs lost during each crash of the Fed's serial financial bubbles.

But the cyclically adjusted trend is down, not up. It represents economic weakness and reduced capacity to generate productivity, income and profits, not strength. The US economy still has 11% fewer jobs in goods production—-mining, energy, manufacturing and construction—–than it did at the December 2007 cyclical peak, and 21% fewer than at the turn of the century.

Whatever is embedded in the BLS payroll count, don't call it recovery, strength or progress. 

Instead, call it a propaganda cloud that serves the interests of Wall Street and the monetary central planners, alike. Here's the thing. You can not sell stock if you tell customers that a recession is coming and earnings are going to be heading sharply in a southerly direction. So Wall Street never does.

An unseen bubble at the heart of the financial system is deflating with unknown consequences. When free markets reassert themselves, and they always do, the disruption promises to be substantial. We appear to be in the early stages of this event.

The bottom line is the massive market distortions fomented by the Fed in recent years are finally starting to unwind.

Without the howling tailwinds of epic Fed easing, the Fed-levitated stock markets are rolling over and mean reverting into a long-overdue cyclical bear that will at least cut stock prices in half.

The future for the world's money is rapidly developing, as will become increasingly apparent in 2016. The era of dollar supremacy is coming to an end, no doubt hastened by the Fed's ultimately destructive monetary policies. The threat to the dollar's primacy is also a threat to the other great paper currencies: the euro, the yen and sterling. Whether or not these fail before, with or after the dollar, is only a matter for timing.

If current events lead to a systemic crisis in western capital markets in 2016, which given the global slump in economic activity looks increasingly likely, a further expansion of central bank balance sheets on top of the post-Lehman expansion seems certain. If this happens, it is unlikely the purchasing power of the dollar and the other major currencies will remain at current levels. And if the dollar loses purchasing-power, price inflation will rise along with nominal interest rates, and a wider debt liquidation in western capital markets becomes a real possibility.

The purpose behind China's accumulation of gold can only be to eventually make the yuan a reliable store of value. China will need to see a higher gold price in yuan, probably at a time dictated by external events, which she will patiently await. This is why, having developed the Shanghai Gold Exchange into the world's most important physical gold market, China plans to price gold in yuan, with the objective that the yuan-gold peg will eventually supersede yuan-dollar peg.

We will surely end 2016 with a wider appreciation that the dollar is no longer king, and that the future for money lies in Asia, the yuan, and gold.

Only in a world gone mad could it be thought a defect to be 'too clever by half.' The probability is that too many people, if not most, are too stupid by three-quarters.


The next downside target is the two lows formed in August and late September.



That may carry bad news for Dow Theorists who link the direction of the transports with the Dow Industrials.

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