Thursday, March 17, 2011

Central Banks Unleash The Fury

The chart below shows each 5% correction in the S&P 500 since the market bottomed in March of 2009.

Only once (April of last year) has it led to a larger decline.

Central banks around the world are working around the clock with liquidity injections (money printing) to keep stock prices artificially high.

The Bank of Japan has pumped in tens of trillions ($400 billion!) in Japanese Yen this week to counter the earthquake aftermath.

The Federal Reserve here continues to pump in $4.1 billion every day.

Who will win?

I believe both sides will lose.  Their inflationary injections will continue to battle the deflationary force of the market (think gravity) and the ultimate winner will be the smart money that leaves the fight and moves over into commodities.

Speaking of which, the chart below shows the PPI finished consumer food price index, which rose 3.9% in the month of February alone.  That is an increase of 46.8% per year in food if the trend were to continue.

h/t The Big Picture / Zero Hedge

Wednesday, March 16, 2011

The Housing Depression Continues

When our country entered a recession in 2000 and finally had the opportunity to heal itself, the Federal Reserve and our government would not allow this to occur.  They pumped a massive amount of printed money and stimulus into the economy creating artificial prosperity through a housing bubble.

Hundreds of thousands of artificial jobs were created to sell houses, finance mortgages, and build way more houses than we needed.

Many have hoped that the Federal Reserve and government's new programs of massive money printing and housing stimulus would recreate the bubble and bring back the artificial jobs.

So far the plan has not worked.

The housing starts this morning came in at 479,000 in February, down 22.5% month over month, and just above the all time record low of 477,000 in April 2009.

Single family housing starts were down 11.8% at 385,000.

The following graph puts the housing starts in historical perspective and clearly illustrates the depression in the industry:

With housing unable to perform another miracle, it will be back to Plan A for the Obama administration and current Federal Reserve.

They will try to stimulate the economy with government spending and transfer payments paid for by the Fed's printing press.

It is the final stage of the American ponzi economy.  When this final bubble explodes, and our government debt and currency both collapse in value, the true economic depression will finally begin.

Tuesday, March 15, 2011

Swiss Franc Safety

While I do not usually focus on the daily movements or noise in the markets, I wanted to provide an update to my article this morning: Japanese Nightmare.

I described the run toward the dollar in the early trading hours as part of the safety trade, however, the dollar has turned down sharply this afternoon and given back most of the gains.

The biggest beneficiary has not been the precious metals but the Swiss Franc.  The chart below shows the steady rise through trading this afternoon.  Perhaps we are one step closer to the final "endgame" where investors realize that running toward a bankrupt country (the US) is not a form of safety.

Marc Faber On Japan

Japanese Nightmare

It is horrible to watch the tragedy over in Japan unfold, as the news continues to get worse and worse regarding the nuclear power plants.

Japan had a flash crash overnight bringing their market down over 16% at one point and has since settled down over 10% in just one trading session.

That is the equivalent of the DOW falling 1200 points in one day.

This is the first true panic we've seen in the global markets in many, many months as all stock exchanges are getting crushed around the world.  (The DOW is down close to 300 points before the open)

My interest is how asset classes are behaving during the panic.  In recent, calmer, sell-offs we saw a move away from the American dollar into Swiss Francs and precious metals.

In this Japanese induced panic we have seen a rush to American dollars (treasuries) and a sell off in all asset classes (including precious metals which are getting hammered in the futures market)

While I did not think the catalyst would be a Japanese earthquake, I discussed this move recently in Big Picture Outlook: Waves.  I feel that there is one more deflationary shock ahead of us with a rush back into dollars, and the response will be a massive monetary stimulus from central banks. (money printing)

This scenario has played out exactly as expected using the Japanese earthquake as a case study.  As their markets fall precipitously, the Bank Of Japan (their Federal Reserve) has pumped over $98 billion in printed cash into the markets just this morning.

The Japanese government has authorized them to purchase ETFs and REITs to essentially bid up the stock market. 

I expect this to be a similar action from both governments and central banks around the world when the crisis moves from being geological back to economic and financial.

Stay nimble and prepared to purchase strong assets if they go on sale. This could be the catalyst for the next major move down.

And while we focus on the market impact here because this is a financial website, it important to remember that many lives are being harmed due to this tragedy.  Our thoughts and prayers need to be with the Japanese citizens affected by this disaster.

Monday, March 14, 2011

Inside Job

Last night I had the opportunity to watch the Academy Award winning documentary "Inside Job."  The film focuses on both the causes of the financial crisis and how nothing has changed within the financial system to prevent the next systemic failure.

The situation has actually become far worse and the large banks have become bigger, have less regulation, and receive even greater compensation and incentive to take risks.

The film is now available at Blockbuster and on Netflix and is definitely worth the time to view.