S&P 500 Will Finish 2010 Poll Results

I would like to thank all (301) that participated in the poll.

• Higher: Nearly 1 out 5, 18%, responded that the S&P will be higher in 2010.


• Lower: 3 out of 4, 75%, responded that it will be lower.


• Unchanged: The rest said it will end exactly where it started.

My Comments

The high frequency of bearish votes was understandable. The market has gone up a lot since March 2009 and voting took place during definable weakness in equities. Traders/investors tend to talk or vote their book (positions).

How would I have voted?

For this poll it would have been higher. My actual, historically-consistent vote would have been Higher* (with an asterisk). What this means is that I expect higher nominal equity prices - us dollar denominated from weaker dollar, but I do not expect higher real price - gold denominated . In other words, gold will continue to significantly outperform equities for a large portion of the depressionary trading box.

Why?

As I have written many times before,

Gold is the tool used to combat the effect of debt implosion to maintain the economic status quo. Those that suggest that stocks and gold are nearing an imminent decline ignore historical cycles/patterns.

A study of the Weimar Republic illustrates a classic example of how devaluation pushes up equities but not as fast as gold. The rise in equities occurred under dire economic circumstances. When the illusion broken, nearly all were wiped out and great social unrest ensued.

While the Weimar Republic may be an extreme devaluation case that pushed the limits of fiat money, it is unwise to assume that it cannot happen again. If fact, what happened in Germany has already taken and is taking place in the U.S.

The following chart illustrates how gold is used to minimize the negative effects of debt build ups after a long expansion. In order to reduce the burden of high debt levels and minimize the adverse economic effects of failing debt, the U.S. dollar has been devalued in large "devaluation steps". In the second great depression 1929-1951, the currency was fixed to gold, so the gold price adjustment was mandated by law. Once currencies began floating after 1973, the birth of fiat actually occurred in 1971, the devaluation steps became quasi market-directed. I say quasi, because gold is not freely traded. It is way too important for that. The U.S., currently within the third great depression, is undergoing or attempting a third devaluation step. That is, a the third gold revaluation since 1860.

Devaluation Steps: S&P 500 Total Market Return and Inverse price of Gold:


The key to the success of these devaluation steps is confidence. As long as the public never questions the dollar as a storehouse of value, the controlled devaluation will continue. If confidence ever fades, then look no further than the Weimar Republic as an example of devaluation that reaches critical mass.

Mailbox

Eric,


I appreciate your insights on your daily commentaries. Your email from last night highlighted the US long term bond indices. I have never understood bonds so I do not understand the implications of the breaking of the long term trends, especially as these are "total return" and "capital appreciation" indices. If these were simply bond price charts, the implications would be clear enough. Would a trend reversal be due more to lower bond prices, a change in interest rates, or what?


Joe

This is an important discussion

I have come to view long-term trend lines, especially total return indices, as the graphical representations of investment decision-making. Positive sloping trend lines represent, in general, inflows. Negative sloping ones illustrate outflows. When trend lines fail, it implies that the money flows, marginal decision-making, have changed. For example, the waffling trend line in the bond market suggests that drivers of the great bull market, the way people view bonds, are beginning to change.

What was once purchased without question will be questioned as the signs of a recognized emerge. The more definable the top, the more investors begin to alter their decision making. This, in turn, alters money flows. It starts with a trickle, but can turn into a torrent as the trend direction becomes more obvious.

I think of trend reversal, trend line failure, as not only a change in price but also opportunity cost. If the bonds continue to deteriorate or under peform other assets, the opportunity cost of holding bonds increases. As price declines and opportunity cost also increases, the price decline will accelerate. This happens frequently in capital markets.

Right now, the transition is still subtle and largely unrecognized. Long-term tops do not end with a bang but rather a whimper.

Regards,

Eric

10 Year Treasury Auction Results

It's not a problem until it has been recognized as such.

10 Year bond auction results continue reflect the trend towards increased anonymous participation. It's called direct bidding.



While PR focuses on the window dressing of stimulus retraction, it ignores potential for infinite QE behind anonymous closed doors.

Source: treasurydirect.gov

Yen Falls as Greece Aid, China Growth Bets Curb Safety Demand

The yen fell for a second day against the euro on prospects the European Union will help Greece stem its budget crisis, damping demand for Japan’s currency as a refuge.

Yen as a refuge? Wow, that's rich. Don't allow MOPE to confuse temporary money flows with safe-haven status. Safe-haven currency implies a consistent refuge from the ravages monetary inflation and lack of fiduciary duty. If that were truly the case, the Yen, all fiat money, would consistently outperform gold since the onset of the depression (global crisis) in 2000. For those new to the site, please review the fiat gold trends since 2000 for confirmation.

The Yen money flows are more a reflection of the interplay between leverage and speculation. The Yen first showed up on the radar screen in early January.

The money flow dynamic between the Commercials and Specs has been extremely consistent in the Yen since 2007.

Ebb and flow within the context of U.S. dollar as the carry trade currency of choice.

Yen and the Nonreportable Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest:


Source: bloomberg.com

One-Fifth of U.S. Homeowners Owe More Than Properties Are Worth

More than a fifth of U.S. homeowners owed more than their properties were worth in the fourth quarter as the number of houses and condominiums lost to foreclosure climbed to a record, according to Zillow.com.

Bank sales of foreclosed properties accounted for a fifth of all U.S. home sales in December, Zillow said. Such transactions made up 68 percent of sales in Merced, California; 64 percent in the Las Vegas area; and 62 percent in Modesto, California, the company said.

More than 20% U.S. homeowners owe more than their properties are worth.

20% of all U.S. home sales in December were bank sales of foreclosed properties.

Combine this with what lumber futures are telling us.

How much of the Fed's stimulus reduction plan talk? Household balance sheets dictate the infinite QE will not end in a controlled, policy directed manner.

Source: bloomberg.com

Bernanke outlines plan for pulling in stimulus aid

In prepared remarks to a House committee, Bernanke says the Fed will likely start tightening credit by boosting the interest rate it pays banks on money they leave at the central bank. Consumers and companies would then have to pay more to borrow.

• The market, not the Fed, sets short-term rates. The Fed has the choice to either listen or ignore them. If the Fed chooses to ignore, short-term spreads will widen (cause and effect). Widening spreads will intensify dislocation created by money flows adapting/playing those spreads, thus, causing unintended consequences. That is a dangerous choice to make in an already fragile credit environment.
• If the stimulus brakes are applied as suggested, the sum drained would be meaningless in terms QE, both official and unofficial, already injected.
• Let's not forget, that there's a big difference between talk of and actual withdrawal.

Source: finance.yahoo.com

China's debt bomb

The ancient military strategist Sun Tzu said that the best strategy was to render an opponent's army helpless even before the battle began. America may still have the biggest and best military in the world.

But many at the Pentagon are starting to realize that, thanks to our growing fiscal irresponsibility, we may be surrendering control of America's destiny to a rival superpower -- and all without a shot being fired.

Source: nypost.com