Coco vs the Trifecta of Trouble

Obama: US economy ‘strengthening’ despite weak data

– Yahoo news

[Re: financial reform bill] It’s a great moment. I’m proud to have been here … No one will know until this is actually in place how it works.

– Senator Chris Dodd, chairman of the Senate Banking Committee

We need to pass the bill so that you can find out what’s in it…

– Nancy Pelosi on ObamaCare (March)

We believe there may be added risk to U.S.-based credit rating agency Moody’s business profile following recent U.S. legislation that may lower margins and increase litigation related costs for credit rating agencies. We are placing our ‘A-1’ short-term rating for Moody’s on CreditWatch with negative implications.

– Standard & Poor’s Ratings Services (Moody’s competitor)

Trifecta of Trouble

The Wall Street Journal has coined the world’s economic worries as the “Trifecta of Trouble“. European debt, a Chinese slowdown and a US slowdown are conspiring against the all important stock market and GDP figures.

That’s rather odd. These three threats would sound rather familiar to long term Markets and Money Readers.

You know our views on the so called “GDP”, but what about financial markets? Checking the ASX 200 every thirty seconds isn’t your editor’s thing. But lately, it’s all become a whole lot more interesting.

That’s partly because Murray Dawes, the editor of our trading newsletter Slipstream Trader, has had a remarkable run at picking the movements of the market. But it’s the way he plays his predictions that is really fascinating. For example, at one point he had a pair of trades, one long, one short, with both in the money about 10% ( in less than 2 months). These were similar blue chips (but not his best performers).

The idea behind the pair trade is that regardless of the market’s move, subscribers are guaranteed profits. His plan is to close out the position that will become less profitable as the market moves up or down, while letting his winning bet run. That means Slipstream subscribers will be profiting from this pair trade no matter which way the market goes.

But back to the market’s daily movements, because they have been intriguing. To be more specific, various indices have been playing silly buggers, in your editor’s opinion.

First we had the US flash crash of May 6, which gave investors quite a fright and left everyone feeling suspicious. Then, on Monday of this week, the ASX did the same thing down under style.

Click to enlarge


That’s a 13% move in a few minutes. A bigger move than the Flash Crash.

Slipstream Trader editor Murray had a grip on things. His reaction was to be irritated about the effect of a data mix up on his charts. So, the excitement was probably much ado about nothing. Only it’s not just indices that are misbehaving. Trades which drove Boeing shares down 44% have been cancelled. “A 17 percent plunge in Citigroup Inc. today triggered a five-minute trading pause, … The order that caused the slump, was cancelled, …”

What’s real anymore? Trades are just cancelled when they are out of favour. If this happened on genuine upticks, Port Phillip Publishing would be out of business. Our subscribers couldn’t realise their gains.

The market manipulators (central banks and government regulators) have funded booms indirectly with low rates, then directly with quantitative easing, and now they are literally zombifying investors to do their bidding.

Regardless, assuming there is any integrity to market action, you can only reach one conclusion about the next few months of index action. That’s because the golden cross has gone dark.

Basically, the chart tells you that a major bear market is in the making, because certain moving averages have crossed. Check out the article for a better explanation.

Liberté, égalité … austérité?

Your editor watched a documentary on Paris Tuesday night. Apparently there is a clandestine group which runs around the city at night fixing things for the sake of it. Like old clock towers. The police arrested them a while back, but the Judge let them off.

The TV show host (legendary Rhys Griff Jones) commented on the fact that Paris spends more money on appearances than any other city. Perhaps this is where the money goes. Paying police to catch the clandestine cleaners and judges to let them off…

Regardless, things are about to change in the French national psyche. Austérité is the buzz word there too now. Politicians are having to give up Cuban cigars while So-kozy continues to enjoy his weekend retreat at Versailles. Ahh, the French.

Speaking of which, Coco Chanel has proved the difference in an ongoing debate about intellectual property between economists. Many from the Austrian School of Economics oppose IP laws. That used to be quite popular. Medical researchers once considered it immoral to file patents.

It just so happens that the fashion industry is an example of how industries flourish in the absence of (significant) IP rights. And ladies, Coco Channel features prominently in the discussion on the side of the Austrians.

But back to austérité. How much can you buy it for?

Austerity goes for about $US 1 billion these days. The Canadians found this out the hard way by hosting the G20, which resulted in austérité going global. And 1 billion is just the security cost for hosting the G20 summit. Damage done by demonstrators pushes up the figure significantly.

Dan discussed the G20 on Monday:

The only real difference in substance between Toronto’s street vandals and the government suits is that vandals are destroying tangible value in front of your eyes while the Keynesian inflationists are travelling forward in time to destroy value. “Pump priming” deficit stimulus spending robs from future demand and misallocates current resources to create the illusion of growth.

So stimulus steals from the long run. But does austerity pay? The German politicians think so. Their argument is that the private sector gets insecure about uncertainty and an unsustainable government debt makes the consumer uncertain. Especially any German consumer with a long memory and an eye on the ECB.

Are they right? Does austerity pay off? Die Bild Zeitung reports that the “Job Miracle Continues” with falling unemployment in Germany. That doesn’t sound like the anti-austerity predictions of Obama, Biden and Geithner (the real trifecta of trouble).

Of course, with a falling Euro, Germany’s export driven economy is having a good old time. But still, the Germans are setting out to prove Keynes wrong. A falling currency is the market at work, stimulating the strugglers, while slowing down the boomers.

That’s why China’s currency is expected to appreciate once it’s allowed to. But not everyone is convinced on that matter.

And not everyone is convinced Greece should stay in the Euro. After a comment from a German politician, which was originally ridiculed, the Germans are supposedly seriously considering giving the Greeks the boot. They have worked out how much it will cost them to do so and it looks mighty less than a Greek bailout.

It’s Budget Love!

The following news must just be another data glitch like the ones discussed above: US “Treasury two-year yields fell to a record” low. Why must it be a glitch? Because even the military has figured out how bad the US debt position is:

Adm. Mike Mullen also renewed his warning that the nation’s debt is the biggest threat to U.S. national security.

“I was shown the figures the other day by the comptroller of the Pentagon that said that the interest on our debt is $571 billion in 2012,” Mullen said at a breakfast hosted by The Hill. “That is, noticeably, about the size of the defence budget. It is not sustainable.”

But still, investors apparently react by driving yields lower.

Hang on. Interest expenses at about the size of the US military budget! And that’s at record low rates. Surely this is in the Recipes for Disaster book.

To donate to the US Fiscal fiasco, click here.

If you don’t, Pennsylvania may have to go ahead and privatise its 621 government owned liquor stores.

You think we’re gloomy?

Royal Bank of Scotland, one of the UK’s eight note-issuing banks, has been causing a stir. Keep in mind that RBS needed more than one bailout to survive the crisis. And now they come up with this:

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on “monster” quantitative easing (QE)”.

“We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable,” he said in a note to investors.

It’s rather strange agreeing with a bank analyst. But don’t think this gets them off the hook. One of our readers sent this in:

With a gun you can rob a bank, with a bank you can rob the world. How is that?


At least we still have the central bankers to disagree with. But wait. “Central banks warn of new crisis if exit left too late”. They are referring to exits from fiscal deficits. The comment applies equally to exiting their own extremely low rate policies too. It’s the old inflation/deflation argument.

And last, but not least in the doom file, Paul Krugman calls this Third Depression a “Long” one.

“We are now, I fear, in the early stages of a third depression… It will probably look more like the Long Depression [of the late 1800s], 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.”

Why so pessimistic?

This third depression will be primarily a failure of policy. Around the world – most recently at last weekend’s deeply discouraging G-20 meeting – governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

Paul should ask the Greeks about this inadequate spending thing.

Currency Kerfuffle

Why not keep this section short? That’s how the Euro was being kept, until recently. The UN is more concerned with abandoning the US Dollar as the world’s reserve currency. Of all the places for this idea to come from!

Well, the ECB was busy rolling over US $530 billion in loans to banks.

And the Americans were busy catching Russian Spies.

But what were those spies doing? Reuters reports:

In the summer and fall of 2009, defendant “Cynthia Murphy” sent reports about prospects for the global gold market. In October of 2009, the SVR responded: “Info: on gold – v. useful (sic), it was sent directly (after due adaptation) to Min of Fin (ance), Min. of ec(onomic) devel(opment).”

Who could make this up?

PS: any American readers, click here to claim your “Obama Tax Hike Exemption Card”, if you earn less than $250,000.

ALP turn RSPT into MMRT as RIO, BHP, XTA go MIA in ACT

We will let Dan cover this in Friday’s DR. It’s too depressing.

Nickolai Hubble
Markets and Money Week in Review

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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David Bode
“Senator Chris Dodd, chairman of the Senate Banking Committee”, christ! the guy looks and sounds as if he’s just done a dozen shouts at the local – and this guy is head of their banking committee – no wonder the country’s stuffed. Nancy Pilosi with her permanently affixed, stupid smile is the speaker of their congress for god’s sake. Russian spies!! I know the US has dumbed down recently but this?? This is sheer cretinism. That RBS banker is right – we haven’t seen real QE yet – especially when their “recovery” snuffs out over the rest of this year.… Read more »
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