RETURN OF REALITY? (US BOND MARKET UPDATE)

NIRVANA IS SHUTTING ITS DOORS?
In the past four years we've all lived in a sort of Nirvana-like state where equities go up everyday and somehow government bond yields go lower too.  For sometime, I've been troubled by the weird relationship many markets have maintained because the activity of the "new-normal" period we've had just doesn't conform to historical norms.

We've had strange intra-market relationships between US government bonds and equity markets, US currency and the stock and bond markets, and even odd performance relative to emerging markets.  In the past week or two though, some interesting developments have occurred which probably tie closely to the Fed hinting that they may taper or begin to taper purchases of bonds and mortgage backed securities.

SELL EM IF YOU'VE GOT EM!
To get the work week started, please take a look at the following screenshots of the government bond price action this morning.  While stock markets are moving up (as they should) when government prices are going down (yields are up), I'm a bit alarmed as these are HUGE moves.  The ten year treasury moving 5% in any direction is massive and can't be good for those hedge funds and insurance companies that are leveraged and positioned the wrong way.

Not to be out done, Japanese bonds are also getting clobbered.  I wonder if the Japanese Central Bank has unlimited QE ready, it looks like they are going to need it.

US Tips (Treasury Inflation Protected Securities) are also getting smacked around too, so it would seem there is nowhere to hide in government bonds today.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

FRANKEN-TARP & THE PHANTOM BAILOUT (DJIA UPDATE)

We've rallied almost 550 points on the Dow based on the rumor that we are all saved and that the ECB in coordination with the alphabet soup of Eurozone entities will create a Euro-version of the TARP (Trouble Asset Relief Program).  As of this typing, Europe has created nothing real in terms of negotiating this facility although we've heard that it will involve a TARP-esque approach to trade poorly performing financial assets (Greek bonds that are garbage) for shiny, glimmering, and sterilized Eurobonds (that don't exist yet).

Clearly the market thinks this is a great strategy and solution to the sovereign debt woes of Europe and the developed world, however I don't think it does anything significant to really address the core issues that at driving investors to shun the financial debt obligations of countries like Greece, Portugal, Spain, and Italy.

JUST LIKE THE US?
In the US TARP, there was a panic-stricken financial world that didn't know how to value mortgage assets because every single debt instrument was being treated like trash.  Good mortgages and bad mortgages were seen as untouchable and therefore the entire market seized up.  Although government regulators and financial market wizards act like this was the worst thing ever, the market repudiation of all mortgage debt was an accurate response because the entire market was tainted.  Yes, TARP eased things as a savior emerged (US Taxpayer) to backstop anything and everything that could be bad.

Unlike the US situation, markets in the Eurozone are operating extremely well AND there is no need for additional liquidity.  Stronger countries that are not overspending like Germany have bonds that are well bid, while disasters like Greece that can't pay their bills or meet interest payments are completely shut out of the market.  THIS IS EXACTLY HOW IT SHOULD BE.  Franken-TARP is really about hiding the bad debt under an ECB SPV (special purpose vehicle --- Enron and other off-balance sheet manipulators should be coming to mind here) and asking the other countries to continue to write checks to Greece to keep its head above water and to pretend that the European banks that hold this crap are financially just fine.  In other words the Euro leadership is asking everyone in the world to just pretend that all is well.  To add to the awesome power of the approach, the ECB and IMF are rumored to intend to allow for levering up these debts too so they can get the biggest bang for their buck.  

PROBLEMS WITH FRANKEN-TARP
The problem with the plan is that it still requires the richer countries to send money to the poor.  This wealth "spreading" will come to a stop at some point as the citizens of Germany simply tell their leadership to stuff it.

Second, as much as the poor countries promise to change their ways, they are still in a depression and won't meet financial targets for spending reductions or for country economic growth, so we will see future shortfalls.

At this moment, I don't see anyone losing either.  Healthy markets have losers (I hate to say it) and this Euro-Franken-TARP approach doesn't have any investors taking haircuts.  The no-loss solution means that risky minded investors didn't learn a thing and can now be counted on to double down and increase the odds of a more cataclysmic implosion in the future.

THE RETURN OF THE PHANTOM.....RUMOR
Finally, I don't see any real action, just a lot of rumor floating and hoping!  We have lots of phantom rumors and then we get other rumors that refute the initial market moving rumor.  The problem with the EU is that you 17 members that don't have any real authority or central decision making power over each other, this is why a central Eurobond is actually the DESIRED outcome as it will bind them together even more and has the potential (based on new agreements that must be put in place to handle EU Bonds) to trump national and sovereign interests.  Those silly conspiracy nuts have long suggested that the Eurozone currency union was really only an initial step toward unification and regional command and control that would result in the abdication of national rights and interests.  As long as the citizens have a say in these accords, there will not be a move to go this direction, however we've seen time and time again political leaders trash their own people's will in an effort to maintain and improve the regional interests of the EU.  (Just ask Greeks if this is true.)

So as much as I simply swoon over the notion that all is better and the all clear has sounded (although nothing has actually been approved or implemented) I just cannot help remembering the days in 2008 where each day a new facility and measure were created to stop the financial damage as bank after bank was swallowed up by their own financial mismanagement and leverage.  It is interesting to me that we see that leverage of 30:1 killed Lehman, but the cobbling together of Greek and other damaged credit into some Frankenstein-like TARP will save Europe.  Good luck with that.

TWO UPDATES
As I was typing and proof-reading the post I noticed that there has been a denial of the levering up for the EFSF.....we'll see if that is true or not.

Also, I found this nice summary of what could be happening as it seems like all of us are simply trying to put a finger on how the Europeans will try to do anything but take a write down.
CNBC - by John Carney - Officials working on a Sovereign Debt TARP for Europe? -


TRADING UPDATE
Oddly enough, I've been discussing a DJIA level of 11,300 for a week or so as I hoped that markets would bounce and it would give me a safer place to reload and short.  We are almost there and I am starting to begin to add to positions.  There is a risk here that we could trade up to 11,500 so I've set a stop just above it to give me some room.  My lower end target here looks to see a retest of the support at 10,650 to 10,700 a move below that makes 10,000 very attainable. (Click on the chart to get a cleaner picture).

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

CLOSED FOREVER - (UNMET EXPECTATIONS MEET REALITY)

We were hungry and cold and we absolutely needed a warm meal.  Yesterday was special, we had reservations at our favorite eatery called the FOMC Diner.  Everyone had been so excited about our afternoon meal and the anticipation had simply been unbearable.  As we parked and walked across the street we were startled to see a sign that rocked us to the core, we were speechless, and worst of all we had the realization that our hope for free desserts to go along with our stimulating meal would be unmet.  Somehow, the FOMC Diner had closed its doors......forever.

OUR DINER OWNER, BEN TELLS US HE IS OUT OF BUSINESS
The much anticipated Federal Reserve meeting decision was made yesterday and within an hour the market finally acknowledged what we've stated for almost two years; that the Fed is out of bullets.  After two and a half years of getting pounded by a false market fueled by hope and trust that unlimited printed money could fix the world debt and solvency crisis, we have been been conditioned to expect the impossible from Ben Bernanke and his friends, but alas we have finally seen that he is a hollow man, simply a shell with little or no substance.

Rather than assault the Chairman with paragraph after paragraph of text describing how he has misled investors and damaged the average senior citizen in favor of banks and the financial elite I will simply highlight the implications of this moment where the world awakened to the impotency of the Fed.  The significant troubles we face are global and cannot be solved with easy fixes or more electronic dollars.  Financial pain is going to be delivered, the question is, who will suffer and how much.

A TWIST OF THE KNIFE
When the Fed released their statement and plan yesterday they essentially told us that they would begin selling treasuries that were short dated (2 to 5 years) and they would buy in the market about $120 Billion in treasuries that were long dated (20+ years).  (The total program is $400 Billion) The impact of this action will actually be that the yield curve should rise on the front end and longer term rates should fall.  The Fed tells us that they are doing this in hopes of stimulating the mortgage market and reviving the housing sector.  I don't buy that and in fact, I strongly believe that this action (the purchase of long dated bonds) was to meet the funding needs of the US Treasury to ensure that we can sell treasuries to someone.  The Fed is essentially budgeting these purchases.  Thus, the Fed and Treasury's coordination helps to fund the government and also put a cap on interest expenses for US debt.  So much for an independent Fed right?!  The situation could get much worse for the Treasury as well since effectively the US government has already spent all of the funds from the last budget battle and is in need of another tranche of money.  I haven't discerned any new love and cooperation between the two political parties over the last couple of months and therefore anticipate that we could actually have a government shut down and perhaps more rating agency downgrades. 

US BANK DESTRUCTION
Banks have been suffering in the last couple of weeks and that fall has accelerated over the last few days.  Since banks borrow "short" and then lend "long", the impact of Operation Twist is that banks will need to pay more for their money and then they will receive less if they actually lend it out to borrowers because longer dated rates should begin to fall.  This movement in rates is making the yield curve flatter, this is exactly what banks hate as they make lots of money when the curve is steep.  In the last several years we have seen the Fed act in the markets with the goal of sustaining and supporting banks and financial institutions no matter how badly it would impact the overall economy or the US financial position.  The key metric that makes the Fed unable to preform more QE is simply that these actions have been strongly correlated to price increases in food, energy, and other commodities (and gold).  Essentially the Fed's hands are tied and Operation Twist was more about meeting government needs for interest rate control and funding than helping anyone else out.  Actually if you think about the implications here, this action further damages retirees and pension funds as their investments are further crushed since most are using long dated bonds for a large portion of their portfolios and they benefit from higher longer term interest rates.

US RECESSION
Many of the metrics I report monthly have shown that our economy has been slowing down and has probably already been in recession for months.  If you felt strongly that this wasn't the case, you might as well throw in the towel as the last vestige of hope was destroyed as asset prices have fallen and we'll see a failure of confidence drive the final nail in the coffin for the economy.  If the Fed is right (and they are always right) then asset prices are the key to recovery AND asset prices are the key to misery and deflation.  Since the maneuvers of the last two years of Fed intervention have produced no tangible lasting economic results then we must assume that the collapse of prices since May 1st will seal the deal and confirm that the US is or will be contracting significantly with no turnaround in sight.  In otherwords, the asset collapse will kill the remains of the business confidence and therefore kill the potential growth that might be in the works.

GREEK DEFAULT AND EURO CHANGE ON TAP
Remember that little area of the world that we would forget every other week when the ECB proclaims that everything is fixed or when the Fed would come out and promise they would do something next month?  Oh yes, that little area.  Unfortunately, Europe is still there and they still have their little issue called Greece.  The Fed whiff yesterday coupled with the complete mess of the Eurozone has heightened the problems and perhaps made the dire straights the world is in more clear.  While the Fed has made USD swaps available to the ECB and foreign banks, the entire area is beginning to fall apart.  The Greeks need another slug of money to stay afloat for a few months and they have been forced to promise that they are really really serious about austerity this time!  Unfortunately for them, the Germans are getting tired of these never-ending bail outs and are realizing that they are going to be on the hook for a larger and larger share of inevitible losses.  Senior German officials are dropping out of the ECB, IMF, and Eurozone leadership and this could signal that they are making subtle moves to extract themselves from this nasty financial disaster called the Euro. 

In recent developments we have seen the contaigen of sovereign insolvency get a bit more serious as several major corporations have removed their excess Euro reserves from French banks and moved them directly to the ECB.  As stewards of these reserves can you blame the corporate executives of these firms?  No, of course not, however this "bank run" demonstrates just how fragile these banks are and how capital impaired they will be in the event of a Greek exit (default).

As I suggested the other day, the ECB and IMF continue to pressure Greece into tougher and deeper cuts which have a circular and negative effect on their economy.  As Greek leaders lay off government workers they harm the economy and as the economy is hurt as more businesses close and exit the nation.  As businesses fail, tax revenues decrease, and more cuts are required.  At some point, Greece will wake up and realize that it is better to pull the scab off at one horrible moment (default and exit the Euro) and reemerge with its own currency rather than destory everything and sell (give away) all of its assets to lenders over years.  I give this 6 to 9 months more at most before Greeks take these actions.

SO NOW WHAT?  TRADING UPDATE
I wrote yesterday that the markets were in no man's land and that investors should wait for clarity before taking a short or long position.  With one more day behind us we've witnessed a -283 point drop on the DJIA and also today's beating of -391 points to end the session at 10,733.  At the cross below 11,250 we essentially got the green light to short with abandon and today's bloodbath was a confirmation of that.  I would not be shocked to see some rallying as the sellers take a breather, so personally, I will add some shorts as we rally higher.

SHOW ME THE MONEY!
Why do I have this kind of conviction despite the 750 point drop in markets?  The reason is simple, show me where the catalyst is for buying?  We have an impotent Fed, we have a disintegrating Euro, we have a slowing economy, we have a broken political system that argues over additional spending when  we should be cutting, and we have US banks that are about to blow up again (see BAC).  I'll be clear, we will probably get a pop here as we bounce off the 200 week moving average in my Weekly 4 Yr Chart, but I will be using that as an opportunity to bet on a further decline.  My hope would be that we rally up to the 11,000 area, I'm just not sure we'll get there.   

$DJI -
Overhead Resistance - 11,000
A convincing break down through 10,700 will mean we will add to shorts with target of 9,750.

If you are absolutely committed to being long the market you must look to the relative value trades we have been highlighting for several months.  Those are the utilities, healthcare, consumer staples, and defense stocks.  (XLU, XLV, XLP, and PPA).  Even these conservative plays could be troublesome in this environment because healthcare and defense should be on the chopping block for reductions in government spending.  Portfolio managers will be looking to buy dividend producing stocks like McDonald's, Coke, and others and hide out in these safer areas.  They will simply look to outperform the overall index and proclaim that they "beat" the market.  Personally I don't like that approach, but there are folks that feel like they must be in, and if that is you, this is where the safer water will be.

ALL of those charts are resting on support.  If we have another rough and negative day, all of those positions are sells in my opinion.

If the downward trend continues for another few weeks we will see a coalacing of politicians that begin to find common ground to make headway and restore confidence.  There will be calls to the Federal Reserve to provide stability and leadership in the wayward markets.  At that moment we will see a final coordinated effort from central banks around the world to step in and halt the financial destruction with loan and debt guarantees and never-ending liquidity.  Ultimately these efforts will fail, but it may provide the last boost before everything simply falls apart.  This could be the point at which gold blows through $2,000 as confidence in the existing global monetary system is utterly destroyed once and for all.

WEEKEND EMERGENCY MEETING
You need to know there is a meeting of the IMF this weekend in Washington D.C. and we could see some emergence of a plan, however I don't think this will be the "Stimulus That Ends All Stimulus" quite yet.  The US markets need to endure a bit more pain to achieve the mobilization of the Treasury, Fed, the White House, and both sides of the aisle.  When they are all acting in tandem, then we will see the last attempt at shoring up the collapsing ponzi scheme.  Till then, this weekend may provide a small bit of fuel to give sellers higher prices to unload.  Europeans are hurting and as an example the EWI (the Italian ETF) is down 50% since May, if the USA was in the same neighborhood, I would guarantee action.

Let me sum this all up for you.  The economy in the US is getting worse.  The economies in the emerging markets are slowing down, the economies in Europe are a disaster, the banks in Europe are about to implode, US banks are under attack and Bank of America may use the nuclear option on its Countrywide purchase, and now the facade of a powerful and helpful Fed has been destroyed.  If we are lucky markets will stay range bound and simply idle along, but at this point I anticipate troubling stories about Greece and Europe's banks to continue to drive markets much lower.  Be careful!

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

DO NOTHING - YOU'RE IN NO MAN'S LAND

THE FED GIVETH....
We are hours away from hearing about the blessings that the Fed will bestow upon us and the market is slightly down.  It is at these times we need to pull back and take a look at a longer perspective and look at what might be ahead.  Wall Street is hoping that Uncle Ben will uncork something truly unanticipated, but in reality his options are pretty limited.

In general, the consensus is that the Fed will go forward with Operation Twist where they attempt to buy longer dated treasuries and sell shorter dated ones.  The impact of this will be to drive longer term interest rates even lower (Grandma, you happy about that?) and possibly move up shorter term rates.

REAL IMPACT? - NOT A CHANCE
If Operation Twist is implemented and successful, we probably won't see much real improvement on the regular Joe or on business owners as people and businesses simply aren't borrowing and lower rates won't make much of a difference.  It will have an impact on banks though, and this could really hurt them as they essentially fund in the short term and lend long, so this compresses their margins and drives their funding costs higher and reduces their income potential on lending.  I think this is why you are seeing all the bank stock prices fall.

THAT EURO ISSUE JUST NEVER GOES AWAY
The Fed is already trying to bail out Europe by providing swap lines where ample dollars are available no matter how horrible business conditions are and in fact we are seeing almost everyone BUT the Fed walk, (no run!) away from European banks.  This week we've heard that major corporations in Europe are taking their reserve deposits from  banking institutions and trying to deposit them directly with the ECB rather than risk losing money at a bank.  That is an indication of confidence isn't it?

So here is the deal, we don't really know what the real impact will be besides that it will move the markets.  If Benny doesn't oblige and give us something awesome, you could see the markets drop significantly.  If the Fed gives us some great news and tells us that free money will be available to the financial elite forever without any cost, we could easily rocket to the April highs from earlier this year.  From my perspective I think we are in a no-man's land right now as you look at a 4 year chart of the DJIA.  Dating back to July of 2008, we were right at 11,750 right before a nasty fall all the way into March of 2009.  Guess where we are right now?  You got it, right at 11,350.  We have some support at 11,050.

This chart tells me that we are playing around in a range that I don't want to trade until I have confirmation of a direction.  If we see real disappointment I might hold off and not even attempt a buy till real support at 9,800.  If we rocket higher with a vengeance and blow up and through 11,800 that might be a nice area to buy.

Even if I am a buyer, you cannot forget that Europe is just one week, month, or year away from having Greece default and blowing up the whole Euro experiment.  It is doomed and it is just so amazing to me to see Greek politicians put their citizens through hell to avoid a lesser hell.  The obvious problem is that Greeks are going to hell, it just would seem rational to go to one of your choosing, rather than going to one that is picked by the IMF or ECB.  If the Euro falls, the dollar automatically gets huge inflows and you can wipe away any stock market gains for the last couple of years.  It is hard to say what would happen to gold at that moment, probably a huge spike and then a fall.  I mention these things because they will happen and we need to be aware of it no matter what our independent banking cartel does today.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

IT'S THE END OF THE LINE KID

http://www.flickr.com/photos/volk/ - Thanks Willy!

I don't know about you, but I've had just about enough.  I can only say that my frustration level in the last two weeks has been the highest in well, ever.  I basically hit the tipping point where I was ready to do many drastic things because I was tired and exasperated that reality had been suspended longer than any time period I would have expected or imagined.  What am I talking about?  Well, you see I have been brought to the breaking point by the fact that our markets have rallied and rallied and rallied while our world financial system has addressed absolutely none of the issues that created the original financial crisis in the first place.  Despite my many long purchases over the last two years, I have never once believed that things were all better and truthfully I still wake almost every morning and check the markets immediately to see that our futures markets would show us down 500 or 1000 Dow points or more.  Well, those days haven't materialized very often lately and I've had to say too often, I'm going to hold my nose and buy. Why am I writing this now?



RATINGS AGENCIES DO A HIT JOB (ITALIAN STYLE)
I'm writing this bearish confession I guess because I can't hold it in anymore.  Although it is obvious to readers that I've had a bearish leaning, I just can't express enough how badly we have attempted to paper over our mess.  Central bankers around the world have simply traded all the excessive credit on company balance sheets and transferred them to government or sovereign debt issues.  In the world monetary system the only thing we accomplished two years ago was to move the ticking debt bomb from the left pocket (private) to the right pocket (public tax-payer obligations).  While the USA has been the largest player in the use of that strategy, the ECB has been at work simply hiding and ignoring excessive debt problems within the EU zone.  We all know that Greece has received all the blame, but the reality is that all of these countries have created ponzi-schemes that were doomed to fail from the beginning.  Greece is simply the country that has reached there first.

Greece's small size has been one of the key reasons that the ECB and IMF have been able to extend and pretend and push these debt issues out farther than I anticipated.  If Greece were a bit larger or actually created something besides more pensioners we'd already been hitting critical mass.  However, last year during the first warning shot, the Europeans were able to play like the problems had been addressed and everyone gratefully carried on and witnessed an amazing comeback in equity markets as the world celebrated the genius of our financial maestros.  Unfortunately, there are larger Greece's that we've been talking about for some time.  I've often mentioned Portugal, Spain, and Italy since Feb 2010 and now it seems like the problem is just too big to ignore.  Just as the ECB and EU are struggling to get the Greek situation all taken care of, Italy has come under significant pressure from the one place we hadn't expected any real responsible analysis.....the rating agencies.  A couple of weeks ago Moody's announced that it was putting Italian sovereign bonds on the list for potential downgrade, (please note you of course wouldn't want to actually downgrade them).  While the warning was bad enough, what really rocked the financial world was that because of the large amounts of domestically held Italian bonds, 16 Italian banks that held those bonds were also subject to potential downgrade.  A couple of these banks are systematically important and connected with others in the EU to cause serious problems.  Uh oh. 

Italian Borrowing Costs Soar

So, once again we are back to square one where this bank could face trouble and if it goes down another goes down which kills this other one.  Through the use of extraordinary measures and suspension of rules and lack of regulation of the CDS markets we have managed to find ourselves and the world right back in the midst of another event.  The central bank leadership including the IMF don't have enough money to begin bankrolling a fix for an issue the size of Italy. Having said all of that, we are very close to the end of the line.  The end of the line is the place where EU membership falls apart, heroic measures are instituted and they fail, and our financial systems are blasted.  We have done nothing to slow down this train and we have only done more to harm ourselves in the process and made the inevitable collision more traumatic. 

SO IS THE COLLAPSE HERE?
Of course it isn't the end, but you can put a big "X" on your calendar on Friday, June 23rd to mark the day where the wheels began to fall off again.  We've already seen the ECB float the idea that it would buy back bonds from troubled countries, also that it would ignore rating agency ratings, and we've seen Italy demand lists of investors that are short Italian bonds.  We will see liquidity injections by the IMF (17% by the USA of course), we'll see suspension of laws, and we'll see the FED send out emergency swap lines and liquidity to save the world.  We'll even see Europe's heroic knight, the Chinese, kick in substantial funds to buy bonds outright.  Unfortunately, it won't work; the jig is up - sort of.
 
EUROPEAN DRAMA ON A GLOBAL STAGE
Crazy as this may seem I'm more afraid to trade now than I was when I was freaked out and near the point of hanging up my options trading account password.  The reason I say this is that now we can be certain that there will be no rules left standing in the way of the end result of sweeping these messes under the carpet, no matter the cost.  Threatening and bribery of rating agencies, suspension of laws, and outright theft of public funds are actions that I can guarantee that we'll see over the course of the next months.  We will see massive printing of funds to create enough money to buy these troubled assets.  This all means that we will see scary dives and euphoric rocket launches and volatility like we haven't seen in quite a while.  Oddly enough, we are going to see all of this theater against the backdrop of US earnings which will probably be better than most bears think.  I think companies posting decent results will make this such an interesting reporting period yet it may be overshadowed by the drama playing out across the pond, this will make it difficult to trade longs or short.

VALUE-LESS PAPER CAN BE VALUED AT ANY AMOUNT
Remember, our currencies are simply made up things. In the past, Indians traded hides because they had value.  The Euro has value because we all agree there is value there.  Back in the midst of the financial meltdown, our Fed and the FASB simply stated that all the worthless mortgages on bank's balance sheets were going to classified as "held to maturity" relieving them of the obligation to find a real price for these bonds.  How could they do this?  Because these debts are made up pieces of paper based on a fictional value of made up paper.  Essentially everyone with financial power in the world colluded and came to an understanding that the mortgage paper had a new value of par and with the wave of an imaginary wand, all things were made whole.  Now in reality we know this isn't true, but it doesn't matter.  I remind you of all of these steps because if you don't understand this and if you don't remember this you will end up frustrated and near the breaking point just like I was a week or two ago. 

Does it change the fact that the exponential growth of world debt is beyond the control of anyone?  Does it mean that there won't be some sort of breakdown in the future where the Euro implodes or the dollar falls apart?  No, not at all.  But it does mean that we need to keep in mind that no matter how bad it gets there will be only one response by those in charge of managing the mess, it will be to press on!  European leaders will buy loads of debt issued by insolvent countries, the Fed will buy US treasuries, China will keep making loans that ultimately will never be paid back, and all of it doesn't matter.  They must do these things because if they don't continue, power and wealth will shift out of their control.  I don't know if you've ever been in a position as executive, but typically it is very hard for those that have position power and decision making power to simply leave it and lose it.  Why would we expect anything different from those making economic and financial decisions for their countries?

TRADING APPROACH
As this mess continues to heat up, I think gold will again be the un-currency.  I have been trying to buy some gold in the last couple of weeks and I had a target of $1475.  I haven't been able to get it there and we probably won't for a while.  Eurozone depositors in the PIIGS have largely shunned depositing money in domestic banks and it is believable that many of those former depositors are trusting in the anti-currency gold instead of the Euro.  Like them, I believe that gold is probably a good play here (due to fundamental issues with the debt crisis).

While there may be a big temptation to hop on to any other commodity-like hard assets, remember, a collapse of the Euro will lead to a strong dollar temporarily, meaning that if you are in the US, the dollar will rise significantly and commodities priced in dollars should also drop.  I'd stay clear.

A strong dollar probably also means dropping stocks, I enjoyed my BRK.B short (here's to you Warren) from Friday, but remember each day will be met with a huge and focused media blitz PR campaign telling us how everything is under control and how amazing the business climate is for companies and how great the earnings numbers have been.  Great company results could have an impact to really jam the indices higher and this is what makes this such a dangerous game for shorts.  We know we will have good numbers and positive conference calls AND announcement after announcement by EU officials stating that everything has been fixed.  While the longer term story may be dark, the heroin junkie stock market can only be focused on the real story for a day or two and then it is back to reaching for that drug induced high.  As I have stated, the driverless train will have a fiery and awful crash when it comes to the end of the line, the frustration is simply that we don't know when.      

BE CAREFUL! 

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/



WHAT DO BOXERS AND QUANTITATIVE EASING HAVE IN COMMON?

QE II IS DEAD!?
June 30th has come at last and that means an end of additional capital injections by the Fed.  What the discontinuation of quantitative easing measures means is that the Federal Reserve will no longer add additional capital to the liquidity of the global monetary system, although we have been put on notice that the current level of capital will stay there. This means that as treasuries and other assets mature and are repaid, the Federal Reserve will take those proceeds and reinvest them in other bonds, it is important to point out that there won't be new money coming on line under this program. 

IS THE PROPELLANT GONE? 

Bears argue that the economy and markets are simply being fueled by these overt actions by the Federal Reserve to "goose" the system, and without new rocket propellant to move the market higher and higher, we'll see a collapse without the stimulus for higher stock and asset prices.  We don't know if that is truly the case, but we do know that the Federal Reserve is stuck in a box of its own making.  They have created a "liquidity bubble" that has elevated the price of financial assets and hard assets like commodities near two year highs.  The Fed has also forced treasury rates to historic lows.  Time will tell if these levels can hold.

Beyond asset pricing, QEII serves another purpose.  QE II serves as a way for the US government to manage its interest cost.  By selectively purchasing bonds in the open market the Fed manipulates the overall pricing of bonds to keep interest rates low.  Without QE II in place, what will happen to interest rates?  Look at how TLT (20 Yr Treasury) has performed over the last couple of days in anticipation of lower bond prices. 

TLT (100 Day)

WHAT DO BOXERS AND QUANTITATIVE EASING HAVE IN COMMON?
I grew up in the great days of boxing in the mid 70's and early 80's.  Some of my most memorable childhood memories involved watching boxing with my Step-Father.  I recall going to see many local boxing matches which included Olympian superstars.  Remember Sugar Ray Leonard, Marvin Haggler, and Larry Holmes?  These were greats that I grew up watching.  After years of being a boxing fan, one thing is clear, boxers never really retire.  If the paycheck is large enough or economic conditions of the fighter bad enough, they always have one more fight left.  In a similar way, QE has been so successful in achieving its goals that the Fed must see it as one of their greatest instruments to combat deflation.  While QE I and QE II sport amazing records and their heydays are past, they may be called up to fight another match in the near future.

If Treasury bond prices move significantly lower (yields higher) or stock markets fall appreciably we will absolutely see a return of QE.  While the Fed has many remaining tricks up their sleeve, QE is one that has immediate results.  QE is truly one of their favorites.  As a market participant that feels strongly that the invisible hand of government should get out of the stock markets I am not sad to see QE go.  Unfortunately I can say with great confidence that QE will be back for at least one more bout; great fighters never go gracefully.

Photo by Cliff1066 - http://www.flickr.com/photos/nostri-imago/with/2872463375/

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

DEFAULT IS THE ONLY COURSE

David Stockman is back on Bloomberg.  If you don't have time for all 6:45 of the interview, fast forward to 3:55 or so.  In the last couple of minutes Mr. Stockman simply lays it on the line and states the obvious, that both parties and the administration are committed to a total default in the US debt.



As I examine the market today, it looks as though it is coming to the realization that the US economy is slowing rather than growing.  All we've heard from the Fed is that stimulus was necessary to save us, yet we are seeing that it has had no real lasting effect other than to defer the inevitable clearing (correction) of over-inflated prices in all asset classes.  All we have heard from the administration of the President is that government spending was necessary to buoy the economy to save us, yet despite a bulging workforce of overpaid bureaucrats, and an increase in government holdings of private industries (GM, AIG, C) we have nothing positive to show for it.

Our housing market is in the tank, and unless you live in a few sheltered areas in the southern states you know that real estate markets are not getting better.

Our job market is poor and as we've seen with new data releases we find that we aren't seeing a sustainable recovery.

Our banking system is still a disaster with lots and lots of worthless assets sitting on their balance sheets not marked to market.

I haven't made a reference to it lately, but Iran is really in the midst of some very interesting events.  Their President is challenging the "spiritual" leadership and Parliament of the country and it seems as though he is now locked in a power struggle with the real leaders in the country.  We knew this guy was a nut, but now he's fired all of the oil ministry officials and has taken over the role as top oil minister himself.  Now, that in itself isn't that crazy, but Iran is set to take leadership of OPEC this year as the leadership rotates every year.  Add to that his insanity and his overt nutty desire to destroy Israel and you have a perfect cocktail of instability.  If you don't think that this could impact oil prices in the world, you are in for a rude awakening.

Stagflationary pressures are in full effect here as we are seeing a slowdown in economic growth and we are seeing commodity prices and input prices rise.  

While China bulls continue to believe that there is no end in sight for the Red Dragon, we are seeing disturbing snipets ranging from the video post made earlier this week on China's ghost towns, and also new reports that China is purposefully shutting in production of its manufacturing by cutting off electricity to producers.  The electricity disruptions are being caused by a lack of available fuel supplies like coal or natural gas.  By creating these interruptions, they will absolutely slow their economy.  Now some may suggest that this is a way to limit out of control inflation, and that may be great for them, but it is important to note that we are NOT decoupled from the emerging economies and a slow down there will result in a slowdown here.

Did we mention the credit problems and growth problems in Europe?  Nahhh, there are no problems there.  As we've discussed, it doesn't matter how bad things get there, the IMF, ECB, and EU will do anything and everything to delay what is going to happen.  While Greece is getting serious, we'll see a couple of more attempts to crush the Greeks with more "helpful" restructurings until finally, it all comes apart at the seams.  As I type this we get new word that another "fix" has been made and  suppose that we'll believe it will stick this time.  Next up is Portugal, Spain, and Italy.  

http://www.reuters.com/article/2011/06/02/us-greece-plan-idUSTRE7511YD20110602

And finally, let's not forget about the Japan disaster.  We are still facing a situation where they are dealing with melting down reactor cores, radiation releases, and an inability to control the situation.  The impact of that debacle is going to have far-reaching effects in the short and long run.  As the Japanese government attempts to find a way to put together a recovery of sorts, we'll see a drastic collapse in growth in their country, but we'll also see the knock on impact of the coming sales of US Treasuries to fund the rebuilding process. 

Take that last comment further and let's explore how this goes down.  Right now, we have the US government that is selling an enormous amount of treasuries at extraordinarily low rates, and clearly our goverment is spending well above what we are making in the form of tax receipts (huge deficit spending).  In order to finance these huge additional borrowings, the Fed has taken it upon itself to purchase these new treasuries in the open market.  As the Fed has continued these dangerous purchases, market participants (buyers like other central banks and investment managers) have stopped making purchases because they can see that the Fed's interference causes rates to be too low and also makes our financial health riskier.  In fact, we know that some investors are short US Treasuries (Pimco).  I just mentioned it, but we also know that China has reduced their purchases of US bonds as the fiscal health of our country has deterioriated.

With potential buyers out of the market and the specter of Japan becoming a net seller of our bonds, we could be in for a significant problem, just like the one that David Stockman outlines in his video.

Now before we get too worked up and you perceive that I've gone full bear here (close) we need to see the full landscape of potential possibilities in the short run.  The drop in the market recently has been noted to have been based on the poor employment picture that still remains stuck.  We also have this threat of a government default as politicians waste time and feign that there will be any measurable change in the status quo and that they actually have enough conviction to not increase the debt limit. 

These "shocks" actually help to raise the USD and to rattle all of the players, this is what the Fed needs to have an excuse to extend heroic measures and "save" us all.  I can see a scenario where we remain in a choppy, scary market for the next couple of months and then witness another version of last year's market rally in the September through December period when it becomes critical for another salvo of QE or stimulus.

We continue to see this scary game played out and as we see the Fed do more and more, we see less and less real and long lasting improvement in the economy.  As I've said before, these actions are not about helping the average person survive and thrive, it is about maintaining power and position at the highest levels.  The Fed is not working for the people, the US, or anyone, the Fed works for the benefit of itself and the banks that make it up.

GOATMUG

UNEASINESS - HOW ARE YOUR PREPARATIONS?

I'll admit that in waking today and following my normal routine I am troubled and uneasy.  Not uneasy in the sense that I'm fearful, uneasy that we are truly at an inflection point in our economy.  Having said that, we have also witnessed a disaster in Japan that is still going, we see war breaking out in the Middle East and a subtle transition of power that is happening unbelievably fast.  All the hurricanes in the Gulf of Mexico we've had in recent years should also put us on notice that those that are prepared have a chance.  Let your mind think through what would happen if your entire state had no power for 2 weeks.  What would you do?  How would you provide?  Are you ready?




I found this list several years ago and bookmarked it.  Unfortunately, I think I still only have about 25 of the items and they are not in a consolidated place to ensure that I could access them in an emergency.  This list is a good starting point and there are many others, but I do feel the deep urge to do this now.   I share this with you so that you might think about if you need to do the same and pray about how to approach this.


100 Items to Disappear First - http://www.thepowerhour.com/news/items_disappearfirst.htm

1. Generators (Good ones cost dearly. Gas storage, risky. Noisy...target of thieves; maintenance etc.)
2. Water Filters/Purifiers
3. Portable Toilets
4. Seasoned Firewood. Wood takes about 6 - 12 months to become dried, for home uses.
5. Lamp Oil, Wicks, Lamps (First Choice: Buy CLEAR oil. If scarce, stockpile ANY!)
6. Coleman Fuel. Impossible to stockpile too much.
7. Guns, Ammunition, Pepper Spray, Knives, Clubs, Bats & Slingshots.
8. Hand-can openers, & hand egg beaters, whisks.
9. Honey/Syrups/white, brown sugar
10. Rice - Beans - Wheat
11. Vegetable Oil (for cooking) Without it food burns/must be boiled etc.,)
12. Charcoal, Lighter Fluid (Will become scarce suddenly)
13. Water Containers (Urgent Item to obtain.) Any size. Small: HARD CLEAR PLASTIC ONLY - note - food grade if for drinking.
14. Mini Heater head (Propane) (Without this item, propane won't heat a room.)
15. Grain Grinder (Non-electric)
16. Propane Cylinders (Urgent: Definite shortages will occur.
17. Survival Guide Book.
18. Mantles: Aladdin, Coleman, etc. (Without this item, longer-term lighting is difficult.)
19. Baby Supplies: Diapers/formula. ointments/aspirin, etc.
20. Washboards, Mop Bucket w/wringer (for Laundry)
21. Cookstoves (Propane, Coleman & Kerosene)
22. Vitamins
23. Propane Cylinder Handle-Holder (Urgent: Small canister use is dangerous without this item)
24. Feminine Hygiene/Haircare/Skin products.
25. Thermal underwear (Tops & Bottoms)
26. Bow saws, axes and hatchets, Wedges (also, honing oil)
27. Aluminum Foil Reg. & Heavy Duty (Great Cooking and Barter Item)
28. Gasoline Containers (Plastic & Metal)
29. Garbage Bags (Impossible To Have Too Many).
30. Toilet Paper, Kleenex, Paper Towels
31. Milk - Powdered & Condensed (Shake Liquid every 3 to 4 months)
32. Garden Seeds (Non-Hybrid) (A MUST)
33. Clothes pins/line/hangers (A MUST)
34. Coleman's Pump Repair Kit
35. Tuna Fish (in oil)
36. Fire Extinguishers (or..large box of Baking Soda in every room)
37. First aid kits
38. Batteries (all sizes...buy furthest-out for Expiration Dates)
39. Garlic, spices & vinegar, baking supplies
40. Big Dogs (and plenty of dog food)
41. Flour, yeast & salt
42. Matches. {"Strike Anywhere" preferred.) Boxed, wooden matches will go first
43. Writing paper/pads/pencils, solar calculators
44. Insulated ice chests (good for keeping items from freezing in Wintertime.)
45. Workboots, belts, Levis & durable shirts
46. Flashlights/LIGHTSTICKS & torches, "No. 76 Dietz" Lanterns
47. Journals, Diaries & Scrapbooks (jot down ideas, feelings, experience; Historic Times)
48. Garbage cans Plastic (great for storage, water, transporting - if with wheels)
49. Men's Hygiene: Shampoo, Toothbrush/paste, Mouthwash/floss, nail clippers, etc
50. Cast iron cookware (sturdy, efficient)
51. Fishing supplies/tools
52. Mosquito coils/repellent, sprays/creams
53. Duct Tape
54. Tarps/stakes/twine/nails/rope/spikes
55. Candles
56. Laundry Detergent (liquid)
57. Backpacks, Duffel Bags
58. Garden tools & supplies
59. Scissors, fabrics & sewing supplies
60. Canned Fruits, Veggies, Soups, stews, etc.
61. Bleach (plain, NOT scented: 4 to 6% sodium hypochlorite)
62. Canning supplies, (Jars/lids/wax)
63. Knives & Sharpening tools: files, stones, steel
64. Bicycles...Tires/tubes/pumps/chains, etc
65. Sleeping Bags & blankets/pillows/mats
66. Carbon Monoxide Alarm (battery powered)
67. Board Games, Cards, Dice
68. d-con Rat poison, MOUSE PRUFE II, Roach Killer
69. Mousetraps, Ant traps & cockroach magnets
70. Paper plates/cups/utensils (stock up, folks)
71. Baby wipes, oils, waterless & Antibacterial soap (saves a lot of water)
72. Rain gear, rubberized boots, etc.
73. Shaving supplies (razors & creams, talc, after shave)
74. Hand pumps & siphons (for water and for fuels)
75. Soysauce, vinegar, bullions/gravy/soupbase
76. Reading glasses
77. Chocolate/Cocoa/Tang/Punch (water enhancers)
78. "Survival-in-a-Can"
79. Woolen clothing, scarves/ear-muffs/mittens
80. Boy Scout Handbook, / also Leaders Catalog
81. Roll-on Window Insulation Kit (MANCO)
82. Graham crackers, saltines, pretzels, Trail mix/Jerky
83. Popcorn, Peanut Butter, Nuts
84. Socks, Underwear, T-shirts, etc. (extras)
85. Lumber (all types)
86. Wagons & carts (for transport to and from)
87. Cots & Inflatable mattress's
88. Gloves: Work/warming/gardening, etc.
89. Lantern Hangers
90. Screen Patches, glue, nails, screws,, nuts & bolts
91. Teas
92. Coffee
93. Cigarettes
94. Wine/Liquors (for bribes, medicinal, etc,)
95. Paraffin wax
96. Glue, nails, nuts, bolts, screws, etc.
97. Chewing gum/candies
98. Atomizers (for cooling/bathing)
99. Hats & cotton neckerchiefs
100. Goats/chickens


From a Sarajevo War Survivor:
Experiencing horrible things that can happen in a war - death of parents and friends, hunger and malnutrition, endless freezing cold, fear, sniper attacks.

1. Stockpiling helps. but you never no how long trouble will last, so locate near renewable food sources.

2. Living near a well with a manual pump is like being in Eden.

3. After awhile, even gold can lose its luster. But there is no luxury in war quite like toilet paper. Its surplus value is greater than gold's.

4. If you had to go without one utility, lose electricity - it's the easiest to do without (unless you're in a very nice climate with no need for heat.)

5. Canned foods are awesome, especially if their contents are tasty without heating. One of the best things to stockpile is canned gravy - it makes a lot of the dry unappetizing things you find to eat in war somewhat edible. Only needs
enough heat to "warm", not to cook. It's cheap too, especially if you buy it in bulk.

6. Bring some books - escapist ones like romance or mysteries become more valuable as the war continues. Sure, it's great to have a lot of survival guides, but you'll figure most of that out on your own anyway - trust me, you'll have a lot of time on your hands.

7. The feeling that you're human can fade pretty fast. I can't tell you how many people I knew who would have traded a much needed meal for just a little bit of toothpaste, rouge, soap or cologne. Not much point in fighting if you have to lose your humanity. These things are morale-builders like nothing else.

8. Slow burning candles and matches, matches, matches

Be careful!

GOATMUG

INFLATION WORRIES? WHAT HUGO CHAVEZ KNOWS THAT WE DON'T

I've written a bunch about how the US economic leadership (Congress, FED, and Treasury) have interests that are absolutely opposed to the values and interests of the average citizen in the US.  One of the first blog posts I created highlighted Ben Bernanke's 2002 speech where he described that deflation was Public Enemy #1 and that the Fed would not tolerate the economic slippage resulting from inflation's scary brother.  In other posts I covered how the FED needs inflation to keep the game going and any hint of deflation creates shudders of fear.  Recently, I reviewed how deflation really wasn't as terrible for the common man in Japan despite what we hear from the Fed in the article titled TURNING JAPANESE. 

In the last several years, we've seen budget deficits and spending like we've never known and many are beginning to think that the Fed's efforts can only result in one thing, runaway inflation.  We've read how Japanese citizens deal with deflation, let's take a few moments and review what regular folks do in inflation ravaged countries like Venezuela.

Please read the reuters story below;

http://www.reuters.com/article/2011/02/25/venezuela-inflation-idUSN2527605120110225

The graphic pasted here from the article demonstrates just how bad the inflation rate in the country has been.

So, what are the tricks for dealing with inflation for the regular person?

• Because gas is heavily subsidized and is almost free - Venezuelans buy cars.  Instead of depreciating, their value increases as the car gets older!
• Essentially people borrow and buy appreciating goods like gold or cars
• They take extra jobs - I guess fat and lazy Amerikans won't do so well to keep up with inflation.

In the reading of the article it is very clear that a person must be very active in keeping up with their finances and financial situation to keep close to the same lifestyle over time.  These guys are putting money to work (or just spending it) immediately because they know that their money will be worth less in must a month or two.

Am I sold that this is our future?  No, I still believe that despite all of his work, Bernanke will fall seriously short and learn that his hubris has done nothing but create a more serious collapse.  However, one of us will be correct and it is important to understand the strategies for dealing with both outcomes.

GOATMUG

KYLE BASS - JAPANESE EMPERORS WITHOUT CLOTHES (PART 1)

Kyle provides some highlights in a CNBC Strategy Session interview with David Faber this morning.  The obvious catalyst for his appearance was his client note which we posted in COUNTDOWN TO EXTINCTION yesterday.  I will post each segment of the interview here from top to bottom so you can watch the clips as you have time.  No matter what, you must watch part 1 which is contained in this post.  You can fast forward to about 1:30 in the video where Gary gives us his perspective of a Japanese stock market index and the impact of QE (Quantitative Easing) to propel markets higher.  Gary's point is that as soon as QE is removed, gravity takes over and markets fall.

While Kyle gets a lot of attention here and it must seem like I have a man-crush on him, I don't, I just agree with the basic fundamental principles of math that Kyle champions.  It is clear from part 2 in the interview that he believes that he is one of the few that actually looks under the hood and kicks the tires to challenge preconceived notions about finance in this world.  And you know what?  It's true!  Kyle is one of the few that examines what many take for gospel, he researches it, and then he is willing to state emphatically that "The Emperor Has No Clothes".  In addition and to his credit, he is willing to bet all takers that the emperor is not wearing anything!

You must recall that Kyle went to every Wall Street firm and presented to them that the housing market and the securitizations were going to blow sky high and each firm rebuffed him and told him he was insane.




TRADING UPDATE
As usual the market is running off today. I've been looking for some sort of correction to get more involved in equities, but we have simply seen a consolidation. You must read these comments that I am still targeting an exit or at least putting on hedges in late April and early May, so as much as I actually feel like we may move higher it is tempered somewhat because I believe we've only got another few months left in the tank and we adhere to the "Sell in May and go away" philosophy.

GOATMUG

COUNTDOWN TO EXTINCTION / KYLE BASS WRITES THE SYMPHONY OF DESTRUCTION

Goatmug often writes solely about economic and trading things in an attempt to warn readers of the disparity between feelings and reality.  In fact for the last eighteen months (since August 2009), the disconnect between feelings and reality have led us to actually invest heavily in commodities and emerging markets despite our longer term fears although we've maintained a careful eye on the "fundamental picture" of reality.  We've essentially had to hold our nose and deploy dollars, despite the fact that we know how it will actually all end sometime in the future and attempt to target areas that would provide enhanced returns.

As I look back, I recall feeling this way in 1999 as an investing novice witnessing worthless companies become overnight sensations.  I felt deep concern in October, November, and December of 2007 when I asked many of my friends to abandon the markets because I sensed that carnage would soon follow.  Now, I still have real hesitation about the state of reality and want all of us to be on alert for a change in the posture and perceived health of the market.  Over the last couple of weeks the stock markets have slowed a bit and have not pushed significantly higher.  Perhaps this is just the buyers taking a breather?  As I have laid out in the 2011 Outlook, I did anticipated a drawdown of 3%-5% early in the year that would allow the markets to reach higher levels inimid April or May.  Guess what?  We haven't really seen that pullback as of this writing.  Timing is everything so we simply need to watch for new cracks and signs of weakness.

I was sharing with a friend today that we must also be on the look out for the end of QEII.  My thoughts for a significant pullback in late April to May has been predicated on the idea that large institutional investors will anticipate the end of QEII in June of 2011 and therefore attempt to get out in front of a draining of the liquidity swamp.  At that time we may see all assets fall and the USD and treasuries actually gain.  I do not believe that these institutions will wait till June to make their moves to see if QE II will be extended or QEIII spawned.

On a longer term time frame (before 2015) there are other pot holes to be aware of.  In the past I have mentioned one of my favorite investors, Kyle Bass of Hayman Capital Management, L.P as one of the smartest guys in the room that was sounding the alarm to the impending MBS and real estate collapse years before it came to fruition.  Kyle made more than $1 Billion betting against the entire industry in 2007 and 2008.  Kyle was featured in CNBC's documentary House of Cards.  Please find my previous posts here - Kyle Bass Part I- Why the Fed is Trapped and also House of Cards .  Kyle is sounding his alarms again and going deeper into his thesis that Japan's massive debt will be one of the first sovereign collapses that well see.  In his article to clients called "The Cognitive Dissonance Of It All", Kyle lays out his firm's view that Japan will not be able to sustain their high debt levels and low interest rates.  So far the country has managed to survive because they have had a nation of savers, but because most of their population is now nearing retirement, they face the mathematical impossibility of keeping their pozni scheme going. 

http://www.zerohedge.com/sites/default/files/Kyle%20Bass%20Feb%2014.pdf

You must read this article!  One of the awesome quotes from his letter is captured below -

"One last point about Japan that is more psychological than quantitative: there is an interesting psychological
parallel between JGBs and US housing. In the last 20 years, Japanese stocks have dropped 75%, Japanese real
estate has declined 70% (with high‐end real estate dropping 50% in the last two years), and nominal GDP is
exactly where it was 20 years ago. What one asset has never hurt the buyer? What one asset has earned a 20‐
year pro‐cyclical, ‘Pavlovian’ response associated with safety and even more safety? The buyers and owners of
JGBs have never lost money in the purchase of these instruments as their interest rates have done nothing but
fall for the better part of the last 2 decades. It is fascinating to see an instrument/asset be viewed as one of the
safest in the world (10‐yr JGB cash rates are currently 1.21%) at a period of time in which the credit
fundamentals have never been riskier. "

What Kyle is focusing on is exactly the type of thought that ripped the financial worlds to shreds during 2003-2007.  Kyle is pointing out that the Japanese Yen and the Japanese Bond is essentially priced to as a risk free asset, or said another way, always to be considered safe money.  Remember real estate?  Remember how all of the securitized deals and tranches of MBS were modeled on the assumption that housing values always would increase?  Remember how pervasive the notion that real estate was easy and riskless became?  Do you remember shows like Flip This House?  Remember your neighbor telling you he was going to start buying houses and telling you there was no way to lose money?  Essentially this is the mentality of investors in JGBs (Japanese government bonds - many of which have been Japanese nationals).  What happens when those Japanese nationals begin selling JGBs to fund their retirement?  What happens when those holders start to lose money on their bond holdings? 

What is beautiful about Kyle's strategy is that he doesn't need a total collapse of Japan to make huge sums of money for his fund or his firm.  Kyle simply needs the world to wake up and realize that there is a real risk that Japanese bond interest rates could go significantly higher, creating big losses for holders of Japanese debt.  I hate to say it, but it goes back to the theme I always talk about, this is about mis-pricing of the cost of credit.  Do you really think buying Japanese bonds at 1% or 1.5% for 10 years is a good deal?  Who is the world would do that?  This is the bet that Kyle is making.  Now a lot of things will go wrong when Kyle's investment bets (gains) are realized, as this will really lead to a systematic collapse of many other institutions and ponzi schemes. 

In closing, many of you may not know this, but Goatmug grew up a rabid heavy metal fan.  The Goat played a mean guitar and often dreamed of being on stage in front of thousands while shredding some hard core riffs on his 6-string axe.  Kyle's note reminded me of one of my favorite Megadeth tunes on the album Countdown to Extinction, the song's name was Symphony of Destruction.  Kyle has composed the symphony, the orchestra is assembling, it won't be long till the destruction is played out in real life on the financial stage.

 

Megadeth - Symphony of Destruction (1993)

 

Enjoy one of my favorites.

GOATMUG

MORE JOBS OR MORE QUESTIONS - BLS DATA OR JUST BS?

Apparently I wasn't the only one that thought the "jobs" report was a little suspect. Please enjoy this video from David Stockman the former Director of the OMB.  He is a regular on CNBC and he completely discounts much of the improvement in the economy and employment.  Fast forward to around 3:00 in the interview.  It is well worth your time.

Specifically, he points out that we are not adding enough jobs to keep up with population growth AND we have less employed folks working than when the recession ended.



Stockman calls into question the use of QE and the remarks that the FED is responsible for all the commodity inflation.  David calls for some sanity in the markets and really suggests that we are in some deep trouble ("and it won't be in 3 years").

GOATMUG