2010-06-28

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.

7 comments:

Dave Narby said...

IMO we need a couple percent sucker rally first.

PEJ said...

Well, yes sure. 2-3% would be just noise in my opinion. I think it will be difficult to test the previous highs though.

Dave Narby said...

Agree.

Unless they announce and implement QE v2.0 and blast it into the moon.

Except that would have the undesired (for them) effect of driving PMs through the moon as well, and cause the collapse of the COMEX along with JPM et. al. However, they might just sacrifice them, or change the rules (e.g. 'only' JPM's PM trading group goes b/k) and they screw the people they sold their counterfeit paper bullion (naked shorts) to, in an attempt to save the system.

Fire or ice, it ends either way.

PEJ said...

So far, it looks like no sucker rally is on the deck... I might have been right, for once :-)

Dave, I would highly recommend you read some of Mish's, Harry S. Dent, and Robert Prechter's work about deflation.

We are going for deflation, whatever central banks

Dave Narby said...

PEJ,

I understand the deflation argument in respects to gold and I believe those author's opinions on them.

However, you clearly do not, or you wouldn't be quoting Mish in the context of the price of gold.

It might be easier if you think about it this way: Is gold an industrial metal? How about the others?

Gold is not an industrial metal.

Silver is traded ~half the time as an industrial metal.

Platinum, Rhodium, Rubidium are expensive industrial metals.

Conflating commodities with money is a recipe for disappointment.

I also wouldn't be short here without further downside confirmation.

pej said...

Dave, I understand your point of view more than you might think: it was my point of view as well, until I better understood our currency systems and what gold was and was not. If you dig my older posts, you might actually find something similar.

That said, I'll just mention it one last time because we cant have the same debate over and over again: what is deflating is the amount of USD, so when we say "deflation", we all mean "usd deflation" or "paper currency deflation" if you want to include other currencies.

Gold might raise, but not because of deflation.

Dave Narby said...

I think we are mostly on the same page.

Per Mish, gold is a 'no-confidence' vote on fiat currencies.

It rises in inflation from an increase in the currency it's priced in.

It rises in deflation from fear of currency stability, so yes deflation doesn't *directly* cause gold to appreciate, at least not like inflation does.

In fact, it only does poorly under periods of low, stable inflation (2-5%), which is interestingly close to the increase in the gold supply each year. Hmm...


I'm not saying it won't sell off if all the markets crash (rapid, extreme deflation) like it did in '08. I'm just saying that it's far less likely to happen the same way this time. I'm keeping some powder dry just in case.

Most traders hate gold. I think because it threatens them, as it's the 'Anti-Fiat' (cue Omen music), and if it were to be universally accepted again, much of the volatility and instruments that are traded would simply cease to exist.