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Thread: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

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    Default Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    food for thought or pure paranoia ?

    (snip)"Richard Russell, the famous writer of the Dow Theory Letters, has a chilling line in today's note:

    Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know -- who told him?" Tell them the stock market told him.

    That's pretty intense!

    Update: By popular demand, here's more on what he sees in the market. The gist is that the markets recent gyrations are telling him that the economy is in trouble:

    And I ask myself, "Am I seeing things? The April 26 high for the Dow
    was 11205.03. The Dow is selling as write at 10557 down 648 points
    from its April high. If business is even better than expected, then
    why is the Dow down over 600 points? And why, if there were 674 new
    highs on the NYSE on April 26, were there only 20 new highs on Friday,
    May 14? And if my PTI was 6133 on April 26, why is it down 17 points
    since its April high?

    The fact is that I've been seeing deterioration in the stock market
    ever since early-April, and this in the face of improving business
    news.
    The D-J Industrial Average is composed of 30 internationally
    known top-quality blue-chip stocks. These are 30 of "America's biggest
    companies." If Barron's is so bullish on the future of America's
    biggest companies, then why isn't the Dow advancing to new highs?

    Clearly something is wrong. But what could it be? Much as I love
    Barron's, I trust the stock market more. If I read the stock market
    correctly, it's telling me that there is a surprise ahead. And that
    surprise will be a reversal to the downside for the economy, plus a
    collection of other troubles ahead.


    About Dow Theory -- First, we saw the recent April highs in the
    Averages. Then we saw a plunge in both Averages to their May 7 lows --
    Industrials to 10380.43, Transports to 4298.12, next a short rally. If
    ahead, the two Averages turn down and violate their May 7 lows, that
    would be the clincher. Such action would signal the certain resumption
    of the primary bear market.

    Just as for years I asked, cajoled, insisted, threatened, demanded,
    that my subscribers buy gold, I am now insisting, demanding, begging
    my subscribers to get OUT of stocks (including C and BYD, but not
    including golds) and get into cash or gold (bullion if possible). If
    the two Averages violate their May 7 lows, I see a major crash as the
    outcome. Pul - leeze, get out of stocks now, and I don't give a damn
    whether you have paper losses or paper profits!"(snip)

    from

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    The flash crash said everything about what is coming.

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    ^^^ what ? You didn't buy into the 'fat fingers' explanation for the 'flash crash' ?

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    This is very intriguing. But I'm wondering something. Looking deeper into the "recent market gyrations", what exactly are the macro/microeconomic variables and trends that suggest there will be a "major crash"? This is a broad question, but I want to know what underlying dynamics point to continued deterioration of the market. What about this economic "recovery" could create a bear market so soon after a recession?

    A story from WSJ's Market Watch says that another previously bullish investment advisor, Dan Sullivan of the Chartist Mutual Fund Letter, "emailed clients last night that he was changing his recommendation from being 100% invested in equities to being completely in cash."

    http://www.marketwatch.com/story/bul...mer-2010-05-19

    Just to play devil's advocate, I'd like to share another article with you. Commentator Mark Hulbert of Market Watch presents evidence which indicates that "[t]here is no consensus on whether high volatility is a positive or a negative omen for the market going forward."

    http://www.marketwatch.com/story/con...ity-2010-05-18

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    Quote Originally Posted by Melonie View Post
    ^^^ what ? You didn't buy into the 'fat fingers' explanation for the 'flash crash' ?
    A bit off-topic, but I'll interject anyway: The most reasonable explanation I've bought is that although a trader caused an initial error, the ensuing (over)reaction was the result of existing skittishness and uncertainty about the state of the market. Perhaps there was something more sinister to it. But if there was, we'll likely never know.

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    my suspicion is that certain 'smart money' investors are afraid that ...

    THIS -

    will quickly turn into ...

    THIS -

    as evidenced by the following ...

    (snip)"Earlier today we disclosed what were not one but several massive central bank interventions in the Euro-Swiss Franc exchange rate. The intervention was large enough to push the rate up by 300 pips, a gargantuan amount in a world where applied leverage is often in the thousands. The amount of capital required to achieve this was likely unprecedented. Yet what bothered us was why would the SNB so glaringly intervene in the FX market not once but three or even more times. Thanks to the Telegraph we find out that the reason was a massive €9.5 billion capital flight from Germany into Swiss deposit accounts just this morning, according to BNP. Unfortunately for Germany this is only the beginning of capital reallocation from the country into neighboring Switzerland. And the technical bounce in the EUR today was in fact an even greater sign of weakness: in fact, as the IMF's Tim Kingdon pointed out, the money run in Club Med banks last week resulted in a massive €56 billion of interbank lending as the move from the periphery to the core accelerated. Now that the next stage of the run is from the core, Europe will very soon find itself with depleted depository capital very soon. Because if money is fleeing Germany, it is certain that France, Italy and the UK can not be far behind. "(snip)

    from


    circling back to 'fat fingers' ...

    (snip)"we know that Europe was hours away from implosion as recently as Friday.

    Tim Congdon from International Monetary Research said deposit data from the ECB shows that there was a "major run" on Club Med banks in the second week of May. Some €56bn of interbank lending facilities were withdrawn, probably as citizens in the South switched funds to banks in the eurozone core. Bank reliance on the ECB lending window jumped by €103bn – or 22pc – in a week.

    "It was extreme and very sudden, probably on Friday afternoon. The eurozone was undoubtedly in peril," he said.

    The question raised by BaFin is whether underlying damage to the eurozone banking system runs even deeper than feared.

    If one considers that Libor keeps crawling higher, and that the Libor reporting dispersion between the European and foreign banks in the BBA USD panel is almost back at record wides, we are fairly certain that the answer to the last question is a resounding yes."(snip)

    ~
    Last edited by Melonie; 05-20-2010 at 01:14 AM.

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    or maybe it's as simple as ...

    (snip)"Despite a 24/7 campaign of carefully managed "good news," 76% of Americans do not believe the U.S. "recovery." Hmm, I wonder why?

    A massive outbreak of economic cognitive dissonance is being suppressed with wave after wave of manufactured "good news." Every visibly negative bit of data is run through a media and Central State assembly line to refashion it as "good news" and "evidence" that the "nascent recovery is taking hold." Whatever cannot be rejiggered is simply buried or suppressed.

    The fact that five corporations control the the vast majority of the U.S. mainstream media certainly aids that manufacturing process.

    Let's run through a few of the most blatant examples of suppressed dissonance: ( snips throughout )

    1. If the economy is recovering so strongly ( +3% GDP growth in the first quarter!) then why are tax revenues down? The April deficit soared to $82.7 billion. Total revenues for April are down 7.9 percent from a year ago. In the seven months of this year, corporate tax receipts are up 8.9% to $77.1 billion. The same cannot be said of individual income tax revenue, which is down 11.6% in the first seven months to $500.8 billion.

    2. Rising corporate profits mask falling sales. Consider Walmart's last report, which caused the financial media to quiver in ecstasy because the retailer logged a 10% increase in profits. But behind the hype, (profits rose $0.3 billion on $99 billion in sales, whoopie), Walmart same-store sales drop; gross margins decline.

    You have to read to the very last line to get to the sobering reality: same-store sales dropped in the U.S. and gross margins declined. Both are bad news, yet you'd never know it from the lead paragraphs and talking heads.

    3. Corporate profits are boosted with special charges and other accounting trickery. It takes a forensic accounting analysis of corporate filings to discern what's real and what's been juiced to boost quarterly "earnings."

    Meanwhile, corporations are loading up on debt again: Junk bonds-- essentially risky bets on future corporate earnings--made up the biggest share of corporate debt sales on record last year. That hardly suggests prudence on the part of the companies loading up on tens of billions of dollars of high-interest debt. Load the company with debt, goose profits, cash out the big bonuses and then let the balance sheet implode.

    4. Much of global corporate America's earnings resulted from the weak dollar. Now that boost to the bottom line has largely vanished in the collapse of the euro.

    Many of America's premiere global companies earn most of their revenue overseas. Equipment maker Eaton, for instance, gets 55% of its sales from outside the U.S. Global companies such as Coca-Cola not only reap most of their sales overseas-- they also depend on international growth to boost their profits.

    As the U.S. dollar has risen 25% against the euro, the U.S. multinationals' plump profits (in dollars) will take a huge hit. Indeed, American multinationals such as Caterpiller have already seen their stocks pummeled as traders realize the dollar's rise will slice their profits.

    Here's how the weak dollar boosted U.S. corporate profits. In mid-2008, when a U.S. company booked 100 euros in profit made overseas, that translated into $160 in profits when calculated in U.S. dollars. Now that same 100 euros in profit translates into $122—a huge reduction.

    5. Income inequality has risen to 1929 levels. If times are indeed good, they're only good for the top 5% of households. The bottom 80% have seen their net worth and incomes decline. So much for "trickle-down" prosperity.

    6. U.S. households remain mired in debt. U.S. households took on too much debt and the consequences are still unfolding: 14% of mortgages delinquent or in foreclosure. This is only the above-water part of the iceberg; banks are holding tens of thousands of loans out of foreclosure lest their insolvency become too obvious. Tens of thousands of homes are being hidden in the "shadow inventory" of homes which are in default but which are not listed for sale.

    7. Another wave of mortgage resets has yet to hit- -housing's bogus "recovery" will dissolve like a sand castle in a tsunami.

    8. The U.S. banking system is still rotten to the core. The list of ills in the U.S. banking industry is long indeed, but perhaps one fact reveals how little has been changed in the past few years of turmoil: U.S. commercial banks (not investment banks) generated a record $22.6 billion in derivatives trading revenues in 2009--the same year that the Federal Reserve spent trillions of dollars to prop up the U.S. mortgage market and the banking sector.

    While massive Federal intervention staved off systemic insolvency last year, many U.S. banks remain effectively insolvent.

    9. The U.S. trade imbalance is growing again. Though imports fell in the recession, imports rose 18% from the second quarter of 2009 to the fourth quarter.

    Ultimately, the trade deficit adds to the nation's indebtedness. Though the trade deficit has dropped from the 2006 peak at $800 billion, it is still on track to reach $500 billion in 2010.

    10. Economic "intelligence" is essentially propaganda. Despite the daily flood of financial and economic data, pundits, government agencies and forecasters were caught off-guard by the subprime mortgage crisis, the resulting banking crisis and now once again by the European banking storm and sovereign debt crisis.

    Many official economic-intelligence reports are of questionable forecasting value. As I reported previously, Federal budget projections are consistently overly rosy and the nation's GDP was recently "adjusted" down 37% in one fell swoop.

    This is a recurring pattern: "good news numbers" are released with much "nascent recovery" fanfare, and then quietly revised down to statistical noise a few weeks later.


    What's the old P.T. Barnum quote ... "you can fool some of the people all of the time ... "

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    or then again, it may just be that 'smart money' investors know a historical parallel when they see one !



    (snip)"Americans know that the Great Depression was started by the crash of the giant Wall Street speculative bubble of the 1920’s, which caused a run on American banks.

    But most Americans don’t know that the second leg of the Depression was caused by European defaults.

    As Yves Smith reminds us:

    Recall that the Great Depression nadir was the sovereign debt default phase.

    Specifically, the second leg down of the Depression was initiated by the failure of the Creditanstalt bank in Austria. Creditanstalt declared bankruptcy on May 11, 1931."(snip)



    (snip)"As Megan McArdle points out:

    The Great Depression was composed of two separate panics. As you can see from contemporary accounts … in 1930 people thought they’d seen the worst of things.

    Unfortunately, the economic conditions created by the first panic were now eating away at the foundations of financial institutions and governments, notably the failure of Creditanstalt in Austria. The Austrian government, mired in its own problems, couldn’t forestall bankruptcy; though the bank was ultimately bought by a Norwegian bank, the contagion had already spread. To Germany. Which was one of the reasons that the Nazis came to power. It’s also, ultimately, one of the reasons that we had our second banking crisis, which pushed America to the bottom of the Great Depression, and brought FDR to power here.

    Not that I think we’re going to get another Third Reich out of this, or even another Great Depression. But it means we should be wary of the infamous “double dip” that a lot of economists have been expecting."(snip)

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    Quote Originally Posted by Melonie View Post
    4. Much of global corporate America's earnings resulted from the weak dollar. Now that boost to the bottom line has largely vanished in the collapse of the euro.
    Exactly. When we keep hearing about the recovery of large U.S. companies, the activity of the market seems illogical. But when you understand the fluctuations in the context of the European debt crisis, it all starts to make sense.

    http://www.marketwatch.com/story/pil...ery-2010-05-20

    Quote Originally Posted by Melonie View Post
    8. The U.S. banking system is still rotten to the core.
    This relates to something I've been concerned about. While I don't have definite evidence to support this assertion, I do believe that impending U.S. financial regulatory reform is also causing a lot of anxiety in the market. For better or worse, if banks keep this up, legislators won't be kind when it comes to passing the final version of the bill. But FinReg is the subject of my next thread.

    And I can't disagree with the other 8 points. They all make perfect sense.

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    ^^^ it appears that both the SEC and Germany's FinReg are fixated on a mistaken assumption ... that legally banning the shorting of critical equities i.e. major financial firm stocks and/or gov't bonds will in fact support higher price levels ( = lower interest rates ). Unfortunately, by outlawing the ability to hedge downside risk, 'smart money' investors are instead prompted to avoid taking on the corresponding upside risk. This explains the flight out of the Euro and into the US dollar / Swiss Franc / Gold. However, the 'gold foil hat' crowd will remind you that the US dollar and the Swiss Franc are still fiat currencies, thus capital flows out of the Euro and into these currencies is merely a shift to a 'lesser evil'. For better or worse, today the US congress voted to proceed with the latest 'financial reform bill' ... which will probably have an equal number of 'unintended consequences' as Angela Merkel's rule change on short selling.

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    Quote Originally Posted by NikkaR View Post
    A bit off-topic, but I'll interject anyway: The most reasonable explanation I've bought is that although a trader caused an initial error, the ensuing (over)reaction was the result of existing skittishness and uncertainty about the state of the market. Perhaps there was something more sinister to it. But if there was, we'll likely never know.
    I haven't heard any evidence of any sort of error. I've read reports about certain big trades taking place at that time, but I can't confirm or deny them. Also, it is routine for liquidity providers to Get The Fuck Out (tm) of the market when something weird happens, because that's when they get taken to the cleaners.

    Dammit - I was talking shit a few days ago about shorting the market, and now look what happens. Should have put my money where my mouth was.
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    Quote Originally Posted by person View Post
    I haven't heard any evidence of any sort of error. I've read reports about certain big trades taking place at that time, but I can't confirm or deny them.
    I stand corrected. I suppose what I read in The Economist and other publications in the days following May 6 was a bunk hypothesis. The explanation that a "fat finger" error of a trader selling Procter & Gamble shares set off the flash crash has apparently been disproven:

    http://www.reuters.com/article/idUSN2012334520100520

    http://online.wsj.com/article/SB1000...814970002.html

    Although investigators have ruled out human error, computer hackers, and terrorists, they're not much closer to understanding what happened. A highly improbable confluence of numerous, similarly improbable factors? Maybe, but it's all speculation at this point.

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    So, if you don't understand it panic?

    Typical market mentality.

    Perhaps uncertainty over -- the new financial regulations; further restrictions on off-shore drilling; the European situation -- would be enough to give the market the shivers whereby they pull their collective collars up and get out of the weather. But are those shivers enough to cause a freeze-out?.
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    About that 30's trend chart... as conditions causing and fixes ongoing are vastly different, though trader mentalities are the same, there is plenty of reason to doubt the same trends will occur this time. But the 'oftwominds' article appearing just before the chart has plenty of truths.
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    Curve Flattening Continues: 2s10s Now Under 240 bps

    http://www.zerohedge.com/article/cur...-under-240-bps

    "The most ominous sign for US bank P&L continues to not relent: the 2s10s curve, which is the primary source of "revenue" for the hedge funds formerly known as US banks until a bunch of idiots came along and repealed Glass-Steagall, has just gone inside 240 bps. As before, we view this as the primary margin call threat, as billions, if not trillions, of wrong-way bets on curve steepening move further out of the money with every passing basis point. Once the first major repo counterparty blinks and demands a trand unwind, this trade will snap and we could see an even faster flattening, which would lead to some scary consequences for every other asset class."

    Melonie, could you please explain to us in simple words what the above means? Thank you!

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    I'm an equities and commodities guy, but I'll give it a shot (waiting for a carpenter to call...)

    So we're looking at the difference between the 2 year bond yields and the 10 year bond yields. This can give you information as to the perceived short and long term inflation risk is (eg. 10 year yields being much greater than 2 years means people think that after 2 years' time money's decrease in worth will accelerate, so they require a higher yield to compensate).

    People have been putting on long curve positions, meaning that their view is that 2 year rates will go up relative to 10 year rates, but the opposite has been happening. Traditionally it sounds like long positions have paid off, as they would when short term inflation fears crop up. Idunno what might trigger curve flattening.

    Trading wise, though, if a lot of banks have put on long positions, they're gonna get burnt and probably won't hold them to maturity. Who's on the other side of all these trades? If there's a squueze as everyone tries to close out, that's going to be a bit of a clusterfuck.
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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    ^^^ true enough on the trading / speculation side. But there is also the banking profits side i.e. Ally Bank paying 2% interest to attract retail 1 year CD money and then lending that money in the form of 5 year car loans at 6%. And mostly, IMHO at least, this is the result of a european 'flight to safety' temporarily increasing demand for US gov't bonds thus pulling down the longer term bond interest rate.

    (snip)"Europe’s debt crisis has lowered inflation expectations, increasing the attractiveness of longer-term securities.

    “What’s going on here is an unwind, a pain trade,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The dynamic is likely to continue. We have fundamental support for flattening.”

    A broad array of investors and strategists anticipated yields would rise throughout the year, with 10-year yields gaining the fastest, Ader said in a telephone interview. He forecasts 2-year note yields to end June at 0.90 percent and benchmark 10-year note yields to rise to 3.25 percent."(snip)

    from

    As ZeroHedge and others have pointed out, this spread had initially widened as a result of rising future inflation expectations. IMHO the US, UK and ECB are all still printing money at a furious pace, which leaves monetary inflation fundamentals unchanged !!! But this development is HIGHLY helpful for the US FED, UK central bank, European central banks etc. ... who need to 'roll over' maturing short term gov't bonds, and sell new gov't bonds, at a record pace in order to fund the US / UK gov't's record levels of deficit spending, the PIIG bailouts etc. Having the longer term rates drop thus saves these gov'ts hundreds of billions of dollars worth of potential debt service costs !!! Wheels within wheels ?

    ~
    Last edited by Melonie; 05-26-2010 at 03:06 AM.

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    of course there are some more intense 'professional' opinions ...

    (snip)"Bob Chapman
    First 6 months of 2010, Americans will continue to live in the 'unreality' the period between July and October is when the financial fireworks will begin. The Fed will act unilaterally for its own survival irrespective of any political implications (source is from insider at FED meetings). In the last quarter of the year we could even see Martial law, which is more likely for the first 6 months of 2011. The FDIC will collapse in September 2010. Commercial real estate is set to implode in 2010. Wall Streetbelieves there is a 100% chance of crash in bond market, especially municipals sometime during 2010. The dollar will be devalued by the end of 2010.

    LEAP 20/20
    2010 Outlook from a group of 25 European Economists with a 90% accuracy rating- We anticipate a sudden intensification of the crisis in the second half of 2010, caused by a double effect of a catching up of events which were temporarily &laqno; frozen » in the second half of 2009 and the impossibility of maintaining the palliative remedies of past years. There is a perfect (economic) storm coming within the global financial markets and inevitable pressure on interest rates in the U.S. The injection of zero-cost money into the Western banking system has failed to restart the economy. Despite zero-cost money, the system has stalled. It is slowly rolling over into the next big down wave, which in Elliott Wave terminology will be Super Cycle Wave Three, or in common language, "THE BIG ONE, WHERE WE ALL GO OVER THE FALLS TOGETHER."

    Eric deCarbonnel
    There is no precedence for the panic and chaos that will occur in 2010. The global food supply/demand picture has NEVER been so out of balance. The 2010 food crisis will rearrange economic, financial, and political order of the world, and those who aren't prepared will suffer terrible lossesAs the dollar loses most of its value, America 's savings will be wiped out. The US service economy will disintegrate as consumer spending in real terms (ie: gold or other stable currencies) drops like a rock, bringing unemployment to levels exceeding the great depression. Public health services/programs will be cut back, as individuals will have no savings/credit/income to pay for medical care. Value of most investments will be wiped out. The US debt markets will freeze again, this time permanently. There will be no buyers except at the most drastic of firesale prices, and inflation will wipe away value before credit markets have any chance at recovery. The panic in 2010 will see the majority of derivatives end up worthless. Since global derivatives markets operate on the assumption of the continued stable value of the dollar and short term US debt, using derivatives to bet against the dollar is NOT a good idea. The panic in 2010 will see the majority of derivatives end up worthless. The dollar's collapse will rob US consumers of all purchasing power, and any investment depend on US consumption will lose most of its value.

    Peter Schiff (3/13/2010)
    "In my opinion, the market is now perfectly positioned for a massive dollar sell-off. The fundamentals for the dollar in 2010 are so much worse than they were in 2008 that it is hard to imagine a reason for people to keep buying once a modicum of political and monetary stability can be restored in Europe . In fact, the euro has recently stabilized. My gut is that the dollar sell-off will be sharp and swift. Once the dollar decisively breaks below last year's lows, many of the traders who jumped ship in the recent rally will look to re-establish their positions. This will accelerate the dollar's descent and refocus everyone's attention back on the financial train-wreck unfolding in the United States . Any doubts about the future of the U.S. dollar should be laid to rest by today's announcement that San Francisco Federal Reserve President Janet Yellen has been nominated to be Vice Chair of the Fed's Board of Governors, and thereby a voter on the interest rate-setting, seven-member Open Markets Committee. Ms. Yellen has earned a reputation for being one of the biggest inflation doves among the Fed's top players." Schiff is famous for his accurate predictions of the economic events of 2008. "(snip)

    from

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    Quote Originally Posted by Melonie View Post
    ^^^ true enough on the trading / speculation side. But there is also the banking profits side i.e. Ally Bank paying 2% interest to attract retail 1 year CD money and then lending that money in the form of 5 year car loans at 6%. And mostly, IMHO at least, this is the result of a european 'flight to safety' temporarily increasing demand for US gov't bonds thus pulling down the longer term bond interest rate.
    Oh - so you lock in a short term spread by going long the 2y/10y spread vs the fed (borrowing short term, lending long term), and then lending short term to your customers at a higher rate?
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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    Quote Originally Posted by Melonie View Post
    And mostly, IMHO at least, this is the result of a european 'flight to safety' temporarily increasing demand for US gov't bonds thus pulling down the longer term bond interest rate.
    Wait on, if you're long the 2y/10y spread, isn't 10 year yields going down a good thing? And they said the spread's narrowing, meaning either short terms are coming down faster than long terms, or long terms are going up or something. (Disclaimer: Tequila. I could have misread everything )
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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    no, if you're long the 2y/10y spread, 10 year yields going down cuts into your profit margin. Remember that where bonds are concerned, yields ( i.e. interest rates ) dropping corresponds with present cash value of the bond itself rising. Thus being long 10y bonds themselves is a nominally good thing if yields drop, because while interest earnings are dropping the present cash value of the 'principal' is rising.

    But being long the spread ( i.e. borrowing short term money at dirt cheap interest rates and loaning / investing it long at whatever higher interest / dividend rates the market sets ) means that anything that narrows the spread is BAD. The basic difference of course is that 'principal' appreciation doesn't really apply to borrowed and lent / invested money ( i.e. any principal value change affects both sides of the balance sheet equally). And if you're a Wall St bank borrowing at the fed window at 1/4% interest rates ... and in turn using that borrowed money to purchase newly issued 10 year treasuries at auction which formerly paid 4% but now pay closer to 3%, a 1% drop in the spread translates into a nearly 25% drop in profits.

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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    Quote Originally Posted by Melonie View Post
    no, if you're long the 2y/10y spread, 10 year yields going down cuts into your profit margin. Remember that where bonds are concerned, yields ( i.e. interest rates ) dropping corresponds with present cash value of the bond itself rising.
    Yeah, I always get the nomenclature mixed up since it's not my market Okay, LONG the 2s10s spread/"curve" = short the short term bonds and long the long term bonds, = borrowing short term and lending long term, = short the short term rates and long the long term rates. My brain's stuck in equity vol term structure language when thinking of spreads, but bond yields are quoted differently, hey

    This table reckons long term yields have been dropping, and short terms flat. So could that be heavy 10y borrowing due to the incoming EU bailout? So if you're a US bank or mortgage agency then you're long the long term rates due to your normal course of business (Go long the 2s10s spread, profit by lending short term to customers and rolling the position forwards over time), and you get to participate in the EU bailout fun too? Cool.
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    Default Re: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

    Americans are already participating in the EU bailout - it's just that most of them don't know it yet ... see the white swan / black swan thread !

    The 'gold foil hat' crowd would tell you that falling rates / rising underlying prices for US 10 year treasury bonds are the result of European 'smart money' ( or more accurately, scared money ) seeking a 'safe haven' against further reductions in the Euro exchange rate / loss of purchasing power. Bloomberg posted a story today that China is also regretting it's trade surplus fund 'diversification' of last year, and is quietly selling off some of it's EuroLand gov't bonds and buying US treasuries ( after all those trade surplus dollars have to go somewhere, right ? ).

    The joker in the deck though is that it is the US FED that is printing dollars out of nowhere to swap for Euros with the ECB ... probably meaning that once the EuroLand 'fear factor' subsides that the US dollar and US Treasury bonds will get 'punished' instead of the Euro and PIIG gov't bonds since the ECB isn't actually printing up more Euros ( they're de-facto swapping PIIG bonds as collateral for US dollars, with the US taxpayer effectively on the hook if the collateral PIIG bonds lose value or the ECB can't / won't repay the US dollar swaps via some medium of equal purchasing power).

    or put another way, this FED / ECB swap arrangement is 'kick the can down the road' on a global scale.

    As to 'heavy 10 year borrowing' ... the US gov't is 'borrowing heavily' in every term ... from bills to 20 year T bonds. Another dirty little secret is that more than half of outstanding US gov't bill / bond debt presently has a term length of less than 2 years, meaning that maturing US gov't short term debt must be 'rolled over' constantly to avoid having to repay the principal at the same time that additional new gov't debt must be issued to cover the ongoing record level deficit spending by the US gov't !!! Initially the US gov't was running short of 'takers' on their new longer term offerings when the volume of newly issued T bonds jumped to record levels, but since the 'Greek Tragedy' / PIIG bailout the auctions are oversubscribed ... for the moment at least.

    Again, the 'gold foil hat' crowd will probably tell you that once the EuroLand 'fear factor' subsides, that the US gov't will again find itself short of willing buyers for long term US Treasuries - which will definitely lead to rising interest rates as well as a US dollar exchange rate devaluation. In their view, a drowning European frog will jump on the floating turd of a US dollar in order to keep it's head above water during a storm... but a turd is still a turd and once the waters calm and the European frog is safe from drowning it will choose other less fragrant options !

    ~
    Last edited by Melonie; 05-26-2010 at 05:46 PM.

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