In an UNBELIEVABLE move off the bottom over the past 6 months and one week, we have gained 58% on the S&P and have finally crossed into our 33% levels (from the highs) that we first set as upside targets back in our July Big Chart Review. At the time I said "I just don’t see that happening without a pullback" yet here we are, with barely a wiggle down since I wrote that on July 27th and up 20% from our July 13th S&P base at 880.
Have we been too bearish? Is it now natural for the market to rise 20% in 2 months without a pullback? Are we really 20% better off than we were 2 months ago? History tells us not to mess with the 5% rule so we SHOULD encounter powerful resistance here as we approach the zone of a roughly 60% move off the March lows as well as 30% off our highs - it’s going to be a rough 2.5% from here. As you can see from the above chart, we have already exceeded all previous recoveries by almost 100% at this point in the cycle. And why not, our government spent $9 TRILLION dollars to do it so we damn sure better have a pretty chart as a souvenir! The other rally that had a spectacular recovery was the the great crash of 1929 (the grey line).
In the 1929 crash, the stock market fell first, not the banks, which didn’t begin failing until 1932 as lack of electronic data and next-day mail meant it took a lot longer for the late payment and foreclosure cycle to start impacting bank balance sheets. Also, of course, they were nowhere near as maniacally levered as today’s institutions. In 1929 the banks did not play the market, they simply lent money to people who invested in stocks, businesses and properties that went bust so there were two distinct waves to the market crash in the Great Depression: First the people went broke, then the banks.
Unemployment in the US in 1930, a year after the crash, was only 8.7% - less than it is now. No one at that time thought it was important to help the average American get back on their feet after many of them lost their life savings and went deeply into debt as their homes dropped in value and jobs became scarce. It was only after…
I have sent multiple petitions to our Congress, and you have signed them.
I raised an unbelievable amount of Hell when TARP was under debate, arguing that we must allow those banks that are underwater to collapse and we must force the bad debt from the system.
The fact of the matter is that you have been lied to for the last decade about our economic state, and if we do not divert from the road we are on our economy, our monetary system and our government WILL COLLAPSE.
Not "might collapse."
Not "might get bad."
WILL COLLAPSE.
It is a mathematical certainty, and here is the proof.
First, I present the graph of our economy - GDP and Debt, from the 1950s onward. This chart you’ve seen before (click any of these for a larger copy)
Now I want to present two charts - the first being a simple mathematical chart of two functions - a GDP that grows at 5% annually and debt that grows at the actual compound rate it has grown since 1953, 8.7946%.
I started both debt and GDP at the same value, $10,000, for the purpose of this series (even though in fact debt was higher than GDP.)
You’ll notice that due to the fact the debt isn’t a constant (and neither is GDP) these are not exact matches - but they’re pretty close!
Now let’s go forward 20 years, maintaining the same assumptions. That is, if you and your wife or husband, or boyfriend or girlfriend sleep together tonight and conceive a child, this is what our economy will look like in terms of debt and GDP at the approximate time they go to college:
You think so eh? Debt outstanding will be six times greater in 20 years. GDP will be three times greater, but having started from a much lower level, will of course continue to lag.
Do you really believe that those interest payments can be made?
Look at that chart.
Now look up above at the top chart.
That is reality right here, right now, today.
Tell me it doesn’t turn into the bottom chart.
I didn’t make these numbers up folks. That compound annual debt growth rate is real.
More importantly, Geithner, Paulson, Bernanke, Bush, Obama: all have emphasized that "we must get more credit to consumers…
The economist David Rosenberg makes the headline statement in today’s missive that “It’s not liquidity driving the market”. Rather than guess at his motivations – let’s have a look at how liquidity is driving the market.
First up, define liquidity as referring to the relative ease with which an asset can be sold. Typically, selling an asset for cash is the most expedient way to realise an asset’s value. In a sense, cash is the most liquid of assets (as a store of value its pretty darn good most of the time and everyone is happy to use it as a medium of exchange). For this reason, cash is at the very heart of the liquidity concept.
When there is an abundance of liquidity for a given asset, selling it can be achieved quickly and with minimum price disturbance to that asset. When there is an abundance of liquidity in an economy as a whole, there is lots of cash available to buy assets – it is relatively easy to sell assets across the risk spectrum.
From this definition, the impact of liquidity on markets seems straightforward. To get a sense of how it can be measured, a former roomie of Mr Rosenbeg, Stephen Roach, points to a useful indicator:
My favorite gauge of the quantity dimension of liquidity is the so-called “Marshallian K” — the difference between growth in the money supply and nominal GDP. In essence, this measures the surplus of money that is not absorbed by the real economy.
When the money supply is growing faster than nominal GDP, then excess liquidity tends to flow to financial assets. On the flip side, if money supply is growing more slowly than nominal GDP, then the real economy absorbs more available liquidity.
Under this model, asset price inflation will be the result of excess liquidity. For example have a look at some research from BCA on the correlation of the US$ gold price with the Marshallian K and then as compared to CPI:
Now while David makes the point that the Fed’s most recent pumping of the monetary base has had little impact on broader money aggregates (as bank lending continues to contract at record rates), by taking a step back from the four week data we can see that the Fed has provided the system with a mountain of cash (charts from…
A lot of people, via emails, letters and phone calls, have been asking me how I can be so pessimist about consumption growth in China given the spectacular consumption growth figures coming out of China – 15.4% year to date. An editor who asked me for a piece, after reading it also wondered if my view – that China’s GDP growth would be constrained by its consumption growth – was such a worrying thing given China’s 15% growth rate of consumption.
The problem is that these are not consumption growth figures. They are retail sales figures. Fair enough, you might think, but the retail sales growth rate should still be a reasonable proxy for consumption growth. It isn’t. Among lots of other noise retail sales figures include government purchases and shipments to retailers even before these shipments are sold to consumers. That makes it a very bad proxy for consumption.
Take a look why. I took the following chart from the September 14 issue of Jim Walker’s excellent Asianomics report. This shows retail sales for the past decade. As you can see, first of all, for all the excitement there has not been much of a surge in retail sales. Secondly, retail sales have been supposedly growing between 13% and 24% for the past six years, which even on an inflation-adjusted basis (I assume it is inflation that explains the late 2007 and early 2008 surge) significantly exceeds GDP growth. But if retail sales were really a decent proxy for consumption growth, it would be hard to tell from this graph that consumption has plunged as a share of GDP.
But it has. Consumption has been growing over the past several years by about 8-9% a year, while GDP has been hurtling forward by 10-12% a year and, not surprisingly, this implies arithmetically that consumption is declining as a share of GDP.
This is supposed to be a short entry, but before closing I should discuss the recent 35% tariffs on Chinese tires imposed by the Obama administration, especially since that seems to have been one of the hottest topics of conversation today. For nearly two years I have been arguing that the global crisis is…
The U.S. government’s auto trade- in program probably lifted retail sales in August to their biggest gain in more than three years and boosted factory output, economists said before reports this week.
Total purchases climbed 1.9 percent, the most since January 2006, according to the median of 60 estimates in a Bloomberg News survey ahead of Commerce Department figures due Sept. 15. The Obama administration’s “cash for clunkers” plan also helped industrial production in August to its first back- to-back monthly increase since 2007, economists said.
Americans flocked to auto showrooms last month to take advantage of the incentive program while purchases of other items were subdued even as evidence mounts that the worst recession since the Great Depression is ending. With unemployment forecast to reach 10 percent by the end of the year, consumer spending likely won’t lead the recovery.
Cars and light trucks sold at a 14.1 million annual pace last month, up 25 percent from July, according to industry figures. It was the biggest gain since October 2001.
Last month General Motors Co. called back 1,350 union workers, its biggest one-time increase in jobs since 2006, as it ramped up second-half production in part to meet demand linked to the government trade-in program.
The Fed’s measure of production, due Sept. 16, probably rose 0.6 percent, the most since October, according to the survey. The report may also show the proportion of plant capacity in use in the U.S. climbed to 69.1 percent, the highest in five months.
Manufacturing in the New York region posted its first back-to-back monthly expansion since January 2008, economists said before a report due Sept. 15. The New York Fed’s general economic index likely climbed to 15 this month from 12.1 in August, according to the survey.
The housing market also is showing early signs of a rebound. A Commerce Department report due Sept. 17 will show builders broke ground on 600,000 new homes last month at an annual rate, a 3.3 percent gain and the fastest pace since November, according to the survey median.
The world’s largest economy contracted 1 percent in the second quarter, the Commerce Department said last month, the fourth straight quarterly drop. That made the downturn the longest contraction since such records began in 1947.
Elements of Deflation, Part 2
The Velocity Factor
Y=MV
Sir, I Have Not Yet Begun to Print
There Are No Good Choices
Washington DC, San Diego, and New Orleans, etc.
Just as water is formed by the basic elements hydrogen and oxygen, deflation has its own fundamental components. Last week we started exploring those elements, and this week we continue. I feel that the most fundamental of decisions we face in building investment portfolios is correctly deciding whether we are faced with inflation or deflation in our future. (And I tell you later on when to worry about inflation.) Most investments behave quite differently depending on whether we are in a deflationary or inflationary environment. Get this answer wrong and it could rise up to bite you.
The problem is that there is not an easy answer. In fact, the answer is that it could be both. Today I got another letter from Peter Schiff, who seems to be ubiquitous. He says the rise in gold is because of rising inflation expectations among investors. Gold is predicting inflation. Maybe, but the correlation between gold and inflation for the last 25-plus years has been zero. I rather think that gold is rising in terms of value against most major fiat (paper) currencies because it is seen as a neutral currency. The Fed and the Obama administration seem to be pursuing policies that are dollar-negative, and they give no hint of letting up. The rise in gold above $1,000 does not really tell us anything about the future of inflation.
In fact, it is my belief that if the Fed were to withdraw from the scene of economic battle, the forces of deflation would be felt in short order. The answer to the question "Will we have inflation in our future?" is "You better hope so!"
I wrote in 2003, when Greenspan was holding down rates too long in order to spur the economy, that the best outcome or endgame over the course of the full cycle would be stagflation. I still think that is the most likely scenario. The Fed will fight deflation and knows how to do that. They also know what to do when inflation becomes too high. But there is a cost.
Back in February, I asked you if we were experiencing a recession or depression. A plurality said it was a depression with a small ’d.’ I agreed and went on to explain why. Since then, things have changed and we seem to be on the verge of what I call a technical recovery (or a fake recovery – take your pick). We may even be on the verge of a multi-year economic expansion – something bears like David Rosenberg should not rule out. But vigilance is still required. I will explain why.
Since the recovery talk has gathered steam, a lot of well-respected economists and policy makers have begun to construct what I consider a revisionist history of events. It goes something like this:
We have just experienced a major economic downturn. Coupled with a financial panic of major proportions, the global economy suffered a severe shock. However, we have learnt how to deal with such crises due to our experiences during the Great Depression. The liquidity crisis was overcome through deft monetary policy. And fiscal expansionary policy aided a return to business as usual much sooner than many would have believed.
As a result, it is quite obvious we have been through a severe contraction, but nothing more than a garden-variety recession complicated – of course – by a financial panic. Back in February, a lot of economists made alarmist predictions of woe, foretelling a global Depression. This was wrong-headed and reckless as we see today. GDP has likely turned up in this third quarter and will continue rising for the foreseeable future. With the worst of things behind us, we can normalize monetary and fiscal policy and return to a more robust economic path.
On the surface, this narrative is compelling. But, I believe it is based on a flawed analysis. I would like to present a different narrative here for you to dissect.
GDP is a poor measure of growth
As Joseph Stiglitz recently wrote, GDP is a very poor measure of growth and economic health. And he is right. There are many questions of statistical accuracy in its measurement. But, more than quantity, I have problems with GDP as a measure because of quality. Robust 4% growth that is underpinned by savings and capital investment is not the same as robust…
The nice thing about decimation is it’s a fractional way to die.
The word decimation is derived from Latin and means "removal of a tenth." The Romans would "decimate" their deserters as well as soldiers who performed poorly in battle by dividing the men up into groups of 10 and having them draw lots. The losing group was then killed by the winners, who were still punished only they felt like winners by virtue of still being alive. As I said, the system has it’s advantages as a General who has to decimate 1,000 men must put 100 to death but a General with less to work with, say 100 men, only needs to mark 10 to die.
Does this system leave the remaining 90% healthier? Well, it certainly means there’s more food left, more medicine, more weapons, more supplies for the remainder. Decimation is exactly what happened to the Financial Sector as 119 Financial Institutions have failed and dozens of others merged out of existence since NetBank kicked off our current crisis on Sept 28th, 2007. There are currently another 416 "troubled" banks as of Aug 27th and that number was revised up from a count of 305 given in May. Sill, there are over 8,246 Financial Institutions remaining with $13.5Tn in cash assets and the FDIC has a $500Bn line of credit to draw on should the need arise. So, to put things in perspective - we haven’t even lost one in 10 and almost all that we’ve lost has been absorbed by another functioning institution. I wanted to put this up front on this section because this is the fulcrum of the misconception that started this crisis.
$1,000,000,000,000 is a lot of money. It’s very hard for a person who has worked their whole lives to save $100,000 to wrap their heads around a number that is 10,000,000 times bigger than that and seeing our government talk about bailouts that START at $700Bn and grow to, arguably, $7,000,000,0000,000 in a matter of months is certain to push some emotional buttons. As a fundamentalist, I try to give our members perspective on the markets and perhaps the best way to view what happened to the economy is to think about an accident victim.
The GDP of the United States is roughly $14Tn a year. Usually, that money cycles around through the body of the economy and we don’t think much about what a big…
The Elements of Deflation
The Failure of Economics
The Super Trend Puzzle
Final Demand and Income
Unemployment Was NOT a Green Shoot
As every school child knows, water is formed by the two elements of hydrogen and oxygen in a very simple formula we all know as H2O. Today we start a series that starts with the question, What are the elements that comprise deflation? Far from being simple, the "equation" for deflation is as complex as that of DNA. And sadly, while the genome project has helped us with great insights into how DNA works, economic analysis is still back in the 1950s when it comes to decoding deflation. Notwithstanding the paucity of understanding we can glean from the dismal science, in this week’s letter we will start thinking about the most fundamentally important question of the day: is inflation, or deflation, in our future?
But quickly, I want to thank the many people who wrote very kind words about last week’s letter. Many thought it was one of the better letters I have done in a long time. If you did not read it, you can read it here. And of course, you can go there and sign up to get this letter sent to you each week for free. Why not become of my 1 million (plus and growing) closest friends?
The Failure of Economics
Among the economists and writers I regularly read, there are some who, if they agree with me, I go back and check my assumptions - I must have been wrong. Paul Krugman is one of those thinkers. I admit to his brilliance, but his left-leaning philosophy does not particularly square with mine, and I find that most of the time I disagree.
That being said, I strongly encourage you to read his essay in the New York Times Magazine, which comes out this weekend. It is worth the high price of the Times to read it, if you can’t get it online. It is a very hard critique and analysis of the failure of current macro and financial economic thought, which didn’t even come close to predicting the current financial malaise. Indeed, as he points out, most schools of thought said the state we are in could not happen. You can read at the essay if you are a member, or register for free if…
This represents my personal opinion, not the views of the SEC or its staff.
I am not going to spend time here talking about how the price of gold is off-the-wall, that it is not just a bubble in the making, but a bubble waiting to burst. I don’t want to waste your time on that point.We all know it is a bubble.
George Soros has said “The ultimate asset bubble is gold”. Many of the top asset managers, such as Tudor and Paulson, are piling on; Paul Tudor Jones recently said gold “has its time and place, and now is that time.” The banks are echoing this view with their research. Goldman has a research piece that looks f...
We know you are busy, we also know you are hell bent on intercepting IOI manipulation as per Mr. Jon Kroeper's recent media appearances. Which is why we kindly request that you get back to us at your earliest convenience with information on how many of the IOIs disclosed below are, in fact, "natural." We will make this a recurring topic on Zero Hedge until such time as you respond to our information request. You can contact us at outsourcefinra@zerohedge.com
Small Caps and Tech continued their good form. Technicals continue to support the move higher for Small Caps (Russell 2000) with new highs for the MACD and +DI line. The Russell 2000 would have to give up 25 points (or 4%) just to test breakout support at 650.
The prior underperformance of the semiconductors was undone with today's 2% gain.
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Tuesday was good and bad for the Oxen Report. Our short sale of the day worked very well for us. I chose Ultrashort Proshares Oil and Gas for our short sale of the day due to my expectation...
BPOP - The ‘popular’ bank popped up on our screens this afternoon after a large-volume risk reversal was established on the stock. The massive trade was likely the work of an investor with knowledge of commercial banks as approximately 60,000 contracts were exchanged on BPOP amid a more than 12% rally in shares of the underlying to $2.60. It appears the trader purchased 30,000 now in-the-money October 2.5 strike calls for an average premium of 33 cents apiece. He funded the purchase of the calls by selling 30,000 puts at the January 2.5 strike for 43 cents each. The investor received a net credit on the transaction of 10 pennies per contract. The motivation is perhaps that this individual is swimming with the rising tide of financial names today and expects a far larger...
Let's take a look at Insider Buying and Selling over the last week or so. These are screen shots from Finviz - the significant buys against a green background first and significant sells against the pink background second. All the buys fit into my screen shot but the sells did not. Click here to see all the sells.
Note that the largest buy in the group, for KITD was at a price of 9.73 (KITD is currently at 11.54). The buy was part of an Equity Offering rather than an open market purchase. Tuzman Kaleil Isaza's (KITD's Chairman and Chief Exec. Officer) history of buys is http://www.insidercow.com/more from Insider
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The problem is that there is not an easy answer. In fact, the answer is that it could be both. Today I got another letter from Peter Schiff, who seems to be ubiquitous. He says the rise in gold is because of rising inflation expectations among investors. Gold is predicting inflation. Maybe, but the correlation between gold and inflation for the last 25-plus years has been zero. I rather think that gold is rising in terms of value against most major fiat (paper) currencies because it is seen as a neutral currency. The Fed and the Obama administration seem to be pursuing policies that are dollar-negative, and they give no hint of letting up. The rise in gold above $1,000 does not really tell us anything about the future of inflation.
Courtesy of 
$1,000,000,000,000 is a lot of money. It’s very hard for a person who has worked their whole lives to save $100,000 to wrap their heads around a number that is 10,000,000 times bigger than that and seeing our government talk about bailouts that START at $700Bn and grow to, arguably, $7,000,000,0000,000 in a matter of months is certain to push some emotional buttons. As a fundamentalist, I try to give our members perspective on the markets and perhaps the best way to view what happened to the economy is to think about an accident victim. 
Courtesy of 
Among the economists and writers I regularly read, there are some who, if they agree with me, I go back and check my assumptions - I must have been wrong. Paul Krugman is one of those thinkers. I admit to his brilliance, but his left-leaning philosophy does not particularly square with mine, and I find that most of the time I disagree.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(