Bubble Amnesia

"The collapse of a Wall Street institution like Lehman Brothers looks nothing like the threatened closing of a branch library.  But this unfolding economic disaster is in fact a series of variations of a single theme.  When times were good and the future seemed bulletproof, all sorts of grand ventures were floated on waves of debt.  Everyone planned to be richer when the bills came due.  Only if the bubble burst would the bills become unpayable. How did so many people forget all at once that the bubble always bursts?"
Source: Time Magazine

Fundamentals, Waves, and Social Mood

"The true fundamentals are the waves of social mood that are patterned according to the Elliott wave model.  As wave 3 down unfolds, corporate profits will fade and Wall Street strategists and investment officers will come to lament the weak "fundamentals".  This is the way social mood works."
Steve Hochberg, Elliott Wave International

4th and 15, Where We Are, Where We've Been

In "The Last Call For Alcohol", I tried to provide a historical perspective via "bar parable" on the Super Size Me Era and the beginning of the contraction that begin in 1999.  James Quinn from "The Burning Platform" has assembled an incredibly detailed historical summary from 1980 with much data to support.  Some excerpts:

"Americans are slowly coming to the realization that unbridled greed is not the same as capitalism. Excessively low interest rates punish savers and senior citizens, while benefitting borrowers, risk takers and Wall Street. Savings leads to investment, while borrowing leads to impoverishment. The actions taken thus far by politicians, government bureaucrats, and the Federal Reserve are the exact opposite of what was required. The next leg down in this Greater Depression will thoroughly discredit those who have promoted a money culture over those virtues that will benefit society in the long run. The current Crisis will require personal sacrifice, renewed community spirit, public consensus, and truth. Failure could prove fatal for our nation. The best of human nature must win out over greed, ignorance, and love of power. Our future hangs in the balance."

"The United States has experienced a three decade long “expenditure cascade”. An expenditure cascade occurs when the rapid income growth of top earners fuels additional spending by the lower earners. The cascade begins among top earners, which encourages the middle class to spend more which, in turn, encourages the lower class to spend more. Ultimately, these expenditure cascades reduce the amount that each family saves, as there is less money available to save due to extra spending. Expenditure cascades are triggered by consumption. The consumption of the wealthy triggers increased spending in the class directly below them and the chain continues down to the bottom. This is a dangerous reaction for those at the bottom who have little disposable income originally and even less after they attempt to keep up with others spending habits. The personal savings rate was 12% in the early 1980s and declined to negative 1% by 2005. The expenditure cascade couldn’t have occurred without easy access to debt. The question that must be asked is, who benefits from debt and who pays?"

"The delusion of the American populace cannot be underestimated. Their worshipping at the altar of materialism and adoration of Hollywood created pop culture was crucial to the societal delusion. Without the corporate consumerism marketing machine, an unlimited amount of credit provided by bankers, and ultra-low interest rates supplied by the Federal Reserve, the delusions of grandeur could not have been realized."

"We have taken the acquisition of material belongings so seriously that it became what we worked for. Material possessions defined who we are. When we lose these possessions we no longer have the identity that we have blindly created by collecting “things”. My God, what have we done?"

I highly recommend that everyone read this entire article.  Long, but full of important details defining where we've been and where we are.
http://theburningplatform.com/blog/2010/06/13/two-decades-of-greed-the-unraveling-featured-article/#comments

Dubya Stats

I continue to be perplexed on how the angry mob fails to post-analyze Dubya's eight year performance.  James Quinn from "The Burning Platform" summarized it like this:

•Total US credit market debt increased from 275% of GDP in 2000 to 365% of GDP in 2009.
•The National Debt increased from $5.7 trillion in 2000 to $13 trillion today. It is projected to reach $20 trillion by 2015.
•Consumer debt has increased from $1.5 trillion in 2000 to $2.4 trillion today.
•The U.S. has spent $1 trillion since 2003 on wars of choice in Iraq and Afghanistan.
•Annual defense spending has risen from $359 billion in 2000 to $896 billion in 2010.
•Unfunded liabilities for Social Security, Medicare, and Medicaid total $106 trillion
•In 2008, Wall Street lost $42.6 billion and required middle class taxpayers to bail them out. Total compensation on Wall Street in 2009 totaled $55 billion, three times the previous high.

The Great Maestro On Derivatives

This one will be a "keeper" for a long time:

“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions …. Derivatives have permitted the unbundling of financial risks.”
Alan Greenspan, May 2005

The Afghan Hot Potato

"Republican National Committee chairman Michael Steele suggested at a Connecticut fundraiser that Afghanistan is 'a war of Obama's choosing' despite the fact that it began years before the president took office."   Source: ABC News

Really?????

"Obama has a bright future. I hope for his sake that he loses, because he will be the “fall guy” and historically during “inflection points” those presidents have been the recipients of bullets (Lincoln, McKinley, Kennedy, Reagan). The “mob” has emerged and they’re seeking someone to lynch (ask Martha Stewart, George Bush, Jeff Emmelt, Ben Bernanke, and Brittany Spears)."
Random Roving, March 24, 2009 (June 30, 2008 email)

"As predicted on election day, President Obama will be the fall guy. A 28 year cycle has come to an end and someone has to hold the 'hot potato'."
Random Roving, March 26, 2010

"As predicted, President Obama now owns the economic contraction. A cycle that commenced in 1982, rolled over in 1999/2000, now is owned by the current president, his administration, and his party. The mob wants the "hot potato" to land in someone's hands."
Random Roving, March 16, 2010

A Perspective From Margaritaville

"We’re kind of a fraidy cat society today.”
Jimmy Buffet, CNN, July 5, 2010

Airborne Consumption

This cool video presents worldwide airline traffic over 24 hours.  Note the northern hemisphere "fuel consumption" versus that of the southern hemisphere.

The Bubble Composite

"As Mark Twain said, 'history does not repeat itself, but it does rhyme' There is a certain rhythm to secular bear markets in that they often take a similar shape in magnitude and duration. Secular bear markets can last anywhere from 10-15 years and I have created a bubble composite based on three well known bubbles and secular bull market tops. The bubbles I used were the Dow Jones from the 1929 peak (Great Depression), gold’s 1980 top (beginning of The Great Moderation), and the Nikkei’s 1989 top (Japan’s Lost Decade). Taking the average path of the three bubbles and overlaying the data with the NASDAQ’s 2000 market top showed that there was a likelihood that 2010 would contain the next major market peak and that we would then have a long slide into the next low in 2013. The bubble composite has been uncannily accurate and projected a market peak in the first half of 2010 followed by a short snap back rally before plunging back to the 2009 lows. Given the bubble composite is an average of three paths the day to day noise is a bit filtered out though the declining trend for the next few years is as clear as day and is not the least bit encouraging."
Chris Pupluva

A very intriguing analysis:
http://financialsense.com/contributors/chris-puplava/when-the-market-speaks-listen

My intrigue with fractals is well known.
http://randomroving.blogspot.com/2001/09/chaos-fractals-and-complexity.html

Casey's Case For A Gold Run

Casey Research makes a nice historical case for the future gold boom.

Happy 4th Of July

Happy 4th of July to all.  May today be a great day for family and friend time!

For the irony, I'll provide a quote from a famous Irishmen about independence.

"In just a couple of years, the scenes of soldiers playing soccer with local youths or sharing ice creams and flirting with the colleens had been replaced by slammed doors on house-to-house raids ... the protectors had become the enemy ... it was that quick in Derry. In fact, it can be that quick everywhere. If there are any lessons for the world from this piece of Irish history ... for Baghdad ... for Kandahar ... it’s this: things are quick to change for the worse and slow to change for the better, but they can. They really can. It takes years of false starts, heartbreaks and backslides and, most tragically, more killings. But visionaries and risk-takers and, let’s just say it, heroes on all sides can bring us back to the point where change becomes not only possible again, but inevitable."

Bono, NY Time Op-Ed

The entire article:
http://www.nytimes.com/2010/06/20/opinion/20bono.html

The Derivative Monster

The "derivative monster" still lurks in these financial waters.  I just finished Michael Lewis' latest bestseller, "The Big Short", which chronicles the details behind the mortgage meltdown.  At the core of the crisis were collateralized debt obligations (CDOs) a form of derivatives.  I still think that derivatives will be the core of the major meltdown that still lies ahead.  The reason is that a small "bet" can control a significant amount of dollars.  It has been reported that $700 TRILLION of derivatives exist worldwide. These options have way too much leverage.

I'm confident on the "what", but the "when" is very unknown.  This financial casino can only keep the gamblers at the table for so much longer.

Weiss Research's team just released this in a report:
-Fact: The U.S. derivatives that helped cause the last debt crisis are merely being shifted around like deck chairs on the Titanic.
-Fact: Nothing whatsoever is being done about the derivatives monster overseas, which is more than TWICE as big.
-Fact: Most important, despite months of debate and thousands of pages of legislation, the two biggest risk-mongers of all — the Treasury and the Fed — didn't even get a slap on the wrist. They got more power.

Every contraction cycle needs a culprit.  Derivatives will be the blame for this one.

"Jim Puplava posted a great article on the banks last year...especially focused on those with large derivative positions. JPM Chase has an incredible derivative position."
Random Roving, August 18, 2002 (pre-blog email days)

The wild ride continues!!
"In February this year he ranted every week on his radio show about 'naked short selling', 'credit default swaps', and 'derivatives'. I was originally unfamiliar with these terms and was amazed last week when they became front page news."
Random Roving, September 30, 2008

"We've just seen the beginning of the derivative implosion. Remember, Warren called them 'weapons of mass destruction'."
Random Roving, January 1, 2010

My Big Short

"Short-selling is as legitimate of a stance as going long and it helps you with an absolute return portfolio. You do the work on a stock or sector, you find out that it is overvalued, you wait for the catalyst that lets the market begin to realize and discount your investment thesis, and you pull the trigger. Uneducated investors deride short-sellers as "evil" as they make money as those very same uneducated investors lose money. That is a silly way to look at the matter."
Robert Hsu

I made my first "short" investments yesterday. Using "ultra short" ETF's, several options exist. I compared several short ETF's and reviewed their performance from 6/6/08 to 3/6/09 (Tremor #1). During this period, the Dow was down 46%. The ETF's I acquired did the following during the same period:
-ProShares UltraShort Financials ETF (SKF) +126%

-ProShares UltraShort Nasdaq ETF (QID) +82%

-ProShares UltraShort Materials ETF (SMN) +84%

Check them out.

The Third Depression

"Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31. Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.  We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense."
Paul Krugman
Source: The New York Times

The entire article:
http://www.nytimes.com/2010/06/28/opinion/28krugman.html

A Case Shiller Housing Index Update

The charts below present the status of U.S. housing through March, 2010.