Perfect timing to short might be just about NOW

Last week was one of the most interesting one for me, who have been studying the Great Depression over the past several months if not years (I actually have been trying to write some posts about it, but due to lack of time, they still remain as draft in my overloaded mind).

Here's a bunch of statistics and figures that have been published this week:

The first quarter GDP was revised down again, the third estimate is down to 2.7% from the second estimate of 3.0%, at the same time all the 'stimulus' from governments are waning. Yet the markets fail to react and adjust as they should...

The banking industry is on the verge of collapse, now that the alt-A and option-ARM mortgages have started to reset. Just as a proof of this, check this report from CNBC:

The statistics, compiled by SNL Financial from U.S. Treasury data, showed 91 banks and thrifts skipped the May dividend payment under the Troubled Asset Relief Program, or TARP. It was the first missed payment for 23 of the banks; for the others, it was at least their second miss.

The number of banks missing their TARP payments rose for the third straight quarter. In February, 74 banks deferred their payments; 55 deferred last November.

SNL Financial's analysis found 20 banks have missed four or more payments since the program began in 2008, while eight banks have missed five payments.

Housing is nowhere from recovery, but actually falling further into the abyss, as showed by the number of mortgage applications and the number of new home sales (charts from CalculatedRisk):

Mortgage applications are back to the 1997 levels, while recently, the rates have reached historical lows: the market is saturated to the point where nobody wants them.

New home sales are at historical lows, way lower than the bottoms of 1982 and 1966. The market is saturated by new homes, but even more so by the governments 'stimulus' packages which shift demand from new homes to existing homes, as people try to benefit from the tax-refund while buying the cheapest possible first home.

The ECRI is back at December 2007 levels — when the last recession officially started. This kind of confirms that the 'statistical recovery' is over and that the 'double-dip' recession is starting. Note that to me, we are in the first years of the Greater Depression, and that the previous 'recovery' has just been an 'accounting trick' from the government.


The markets have declined by about 10-15% from their recent highs, yet complacency remains high:

The VIX index remains very low, specially if you consider that we had a 10% crash just a few weeks ago. Market participants still rationalize the crash as a market anomaly due to computers trading.

The Put/Call ratio is barely reverted back to its mean, not showing exuberance, but still symptom of complacency after such a major rally, and flash crash.

The Bullish indices are still showing about a neutral to bullish sentiment, while the past several weeks of trading have been mainly declines, and that the market has been completely unable to sustain any rally.

So, all this said, you would expect the consumer sentiment to reach new lows, right? But instead, it has reached the highest point since Jan 2008:

Consumers are now very confident that the recovery is here

To the point where irrational thinking is back:

"It is ironic, but there is a growing consensus that there may be a new housing shortage coming," said James Gaines, a real estate economist with Texas A&M.

The fact that consumer sentiment is so high, and that so many people think the markets have now bottomed — even self-proclaimed contrarians — lead me to believe that we are at some period equivalent to the 1933 one. The 2008-2009 crash was similar to the drop of the March 1932 to Jul 1932, followed by the massive rally into september 1932, and we had then a decline of about 50% in the following months. In September 1933, the general impression was that the recession has ended, and that we're back to normal.

The economy couldn't be in a worst shape, and it took more than $1 trillion of junk buyback by the Fed, and $1 trillion of stimulus by the government to obtain such a pathetic result. Those buybacks are not coming back, nor are the stimuluses...

Finally, another interesting point is that the market has failed to rally sharply, despite the steady declines of the past few weeks.
My rationalization is that nobody dared to short at the top, and that there aren't any shorts to cover at these levels. If this was to be true, it would mean that another air-pocket similar to the "flash crash" is highly likely.