Friday, January 1, 2010

End of Decade Update - Decade of Paper, Year of the Great Deception...

Happy New Decade! Can you believe that the first decade of the 21st century is gone already? It seems like just yesterday everyone was fretting the year 2000 rollover. As it turns out, if you owned stocks, your worry was absolutely justified.

Back at the beginning of the decade gold was roughly $280 an ounce, it closed the decade at $1,096 an ounce, a gain of 391%. The dollar index was 102, rose to 121 and closed the decade at 77.95, this is a 24% drop in the value of our dollar compared to a basket of other devaluing currencies, and is 36% below its decade high. As you view the following charts of equities, please keep this devaluation in mind. Had stocks remained LEVEL for the decade, the purchasing power of your money dropped considerably, thus representing REAL losses much greater than is represented below.

For the DECADE, the S&P 500 lost 24%, the DOW Industrials lost 9.2%, the NDX lost 49.7%, and the RUT gained 23.7%.

Since their respective ALL TIME HIGHS, the S&P gave back 29%, the DOW Industrials have lost 27%, the NDX lost 61%, and the RUT has lost 27%.

For the YEAR 2009, the S&P gained 23%, the DOW Industrials gained 19%, the NDX gained 53%, and the RUT gained 25%.

So much for buy and hold as an effective strategy, how many people actually realized anything close to the gains of this year? Very few I would wager. And considering the devaluation of our money, the losses over the past decade are staggering.

Since 2009 was the year of the Great Deception, I have to label the past decade as the decade of Paper. More DEBT was generated in the past decade, BY FAR, than in the entire previous history of the United States. This is exponential math at work.

As anyone who has ever spent some Time with the Good Dr. Bartlett knows, it requires very small growth rates over time to produce parabolic shaped curves on the back of exponential growth. All exponential growth eventually collapses under its own weight, that is simply what happens in nature and the markets and our money are a part of nature whether people want to acknowledge that or not.

The growth in debt (and money since our money is backed by debt), definitely experienced exponential growth during the past decade as the following charts show. Total Loans and Leases at Commercial Banks more than doubled during the past 10 years, growing by more than $3 Trillion, but beginning to fall during the past year, the beginning of the end of the parabolic phase in the private sector:

Meanwhile, public sector debt is experiencing a parabolic rise for the history books, again more than doubling during the past decade:

At this rate of exponential growth, the doubling times become shorter and shorter. Like all parabolic curves, this one, too, will collapse, that I can guarantee. How high it will go and how long it will take before it does begin to collapse, I can’t know, but I can surmise that it won’t be too much longer due to the fact that the ability of incomes to service even greater amounts of debt has already reached an end. This is a condition of saturation, a condition that came much sooner than most people realize.

The following two charts are extremely important, yet I’m certain that Bernanke has no understanding of what’s happening here. These charts show debt’s contribution to growth, in this case to GDP. You can clearly see that as we’ve gotten closer to saturation that putting debt into the system gets less and less effective. The trend line was saying that it would be the year 2015 when one dollar of new debt would add ZERO towards GDP.

Well, according to Christopher Rupe, a poster on Ticker Forum who tracks this information by the quarter and charts it, during the third quarter one dollar of debt produced NEGATIVE 15 cents worth of goods and services! We are already PAST ZERO HOUR. Hard to imagine, but adding debt now subtracts from the economy more than it offers - that's debt saturation! He gets his data straight from the Treasury and BEA, plugs it into his spreadsheet and viola, out comes a product that is of utmost importance, one that your government fails to track or report:

Think about that before you try to imagine what the next decade will be like. Understand, of course, that our money is backed by debt. Any light bulbs coming on? I hope so.

Because the math is so far from working, it is my prediction that some form of fundamental change to our money system is going to happen soon, very likely before the next decade is out.

Remember that as stress is encountered in one of the major asset classes, that asset class will convert to dollars and then flow to other classes of assets:

In this case we are seeing unbelievable stress in the “asset” class of DEBT. According to the Wall Street Journal :
Last Update: 12:27 PM ET Dec 31, 2009

NEW YORK (MarketWatch) – Treasury prices fell on the last day of 2009, pushing 10-year yields toward the biggest annual increase in 10 years, as weekly jobless-claims data boosted optimism that the U.S. economy is slowly stepping away from the deepest recession in decades.

Treasurys are headed for a 2.5% loss this month -- and the biggest annual loss since "Superman" and "Grease" hit movie theaters more than three decades ago.

"We will see higher long-term rates, limited inflation, improving economic conditions, a slowly improving dollar and a slow crawl upward in confidence" during 2010, said Kevin Giddis, managing director of fixed income for Morgan Keegan & Co.

That’s right, 2009 was the largest loss for long term bonds in the past 30 years. And rates on the long end rose the most of the decade in 2009!

Mr. Giddis sees higher rates, limited inflation, and improving economic conditions. What Nate Martin sees is exponential growth in the debt markets, a parabolic rise in bonds, and their subsequent collapse. I spelled all that out last year here: Bond Market Hide & Seek – A Domed House & 3 Peaks...

As far as the economy goes, there has been ZERO real improvement, all of the supposed “improvement” we’ve seen began to occur once the financial industry was allowed to resume mark to fantasy financial accounting and our government began creating debt like there’s no tomorrow:

Thus all supposed improvements over the past year, are paper only. All sectors of our economy are saturated with debt, our government is the only sector where debt is still growing. Once debt growth in that sector tops and begins its inevitable slide down the backside of that parabolic curve, that’s when, as they say, “the music stops.” The same “tune” will not be playing for your kids at your age. In fact, I will not be shocked or surprised when the music stops playing, it could happen at any time.

To witness what happens when the math goes exponential and when a parabolic curve collapses, one need only look at a long term chart of the NDX. Here it is since its inception:

This is a CLASSIC parabolic curve and subsequent collapse. This is what happens in nature, it is what happens to overpopulated organisms when their food runs out, and it the same thing that happens to companies when their credit runs out. This chart looks nearly identical to all the major credit collapses throughout history.

Since we’re talking some pretty long timeframes, we need to discuss the use of logarithmic charts. When the “log” button is selected on charts, it displays the movements in percentage move terms instead of keeping the scale equal. Almost all technicians use logarithmic functions when dealing with long timeframes. Nate is here to tell them that they need to occasionally turn those switches OFF. The reason is that they smooth charts out over time and HIDE exponential growth, the very thing that happens in nature and in the markets. When you have that log switch selected, you are not fooling nature, you are fooling yourself. Sometimes it needs to be on in order to view changes, but not all the time. Thus you will find that I present charts both ways, I try to tell you which I am using, but make sure you look at the top of my charts to see.

For example, below is a 110 year NON LOG chart of the DOW Industrials. Each candle represents an entire YEAR. Note how the exponential math led to a parabolic curve that is in the process of collapsing. Parabolic curves generally return all the way back to their base, but perhaps “this time will be different?”

Below is the same chart with the LOG function turned on. Now the collapse in 1929 can be seen, but the parabolic growth has been masked:

Here is a YEARLY NON LOG chart of the S&P 500 since 1928. Clearly a parabolic shaped rise that ended in a double top formation:

And this is what the same chart looks like with the log function turned on:

Which is the correct representation? Well, if you were a bunch of bunnies on an island who just ate yourself out of food, the non log chart would best represent reality. Stock markets and the debt and money behind them are no different. REAL growth does not occur based upon paper, it occurs based upon the cumulative productive efforts of the people. No, spitting out derivatives and marking them to model is not productive effort – it is counter-productive effort.

By the way, basing price to earnings ratios on “operating earnings” where “one time charges” are removed, is likewise not operating in reality. Keep that in mind and always ask yourself what type of P/E ratio are you looking at when comparing to history. You must compare apples to apples, and I can guarantee you that long term historic P/Es are NOT based upon operating earnings and that supposed “one time” write offs have never been so frequent. The chart below shows historic apples to apples. Yes, I expect that as we roll past the 4th quarter that this will fall dramatically, but it will still be at historic highs, not historic lows. Ignore if you will, that’s exactly what those who owned stock in Enron did:

I’d like to make a special note of the yearly hammers that were created on charts above. Are they positioned for a bottom, or are they a hammer near the top, and how valid are candlesticks on a yearly basis? I don’t have a clear answer for that, but I know that if I could show you a candlestick for the decade (the charts don’t have the ability), that it would have a very long stemmed top looking wick sticking high up into the air as prices rose and then retreated over the decade. I would not read too much into that, I just wanted to point it out prior to moving on.

Now let’s look at the major indices over the past decade…

Below is the DOW Industrials 10 year chart, each candle represents the price action over a month. We reached an all time high in late ’07 (many of the same divergences that were in place then are back in place now), collapsed, and subsequently retraced a little more than half the move on falling volume:

Below is the S&P 500 over the past decade. Clearly ran into a huge double top, collapsed, and retraced 50% to today, forming a rising wedge that has already broken:

Here is the past decade in the Transports. They are actually up during this timeframe, a divergence against the rest of the market, but still a very long way from their all time highs:

Here is the past decade in the NDX, obviously a disaster as the money bubbling underneath the tech stocks left just as quickly as it came:

And in the RUT (small caps) we find that they have gained for the decade, solely based on the recent paper induced bounce:

Below is the monthly chart of GLD, the gold based ETF since its inception in 2004. Up a huge amount, but this latest month was strongly down and on record volume:

The US Oil ETF, USO, has lost 67% of its value since its peak:

IYR, the commercial real estate fund lost 75% of its value from peak and has since regained a little more than 40% of its losses:

Very importantly, the XLF (financial sector ETF) has lost 83% of its value top to bottom and has only managed to regain about a third of its losses despite reinstating mark to fantasy accounting rules. The top 3 banks now dominate the industry to a before unimagined degree. Here you will find the source problems of our paper economy and the men who profit:

Below is the housing sector ETF, that’s where you will find the people living who pay the men who profit. A weak 23.6% retrace is all you’ll find in this bubble devastated wasteland of “wealth” destruction:

I have covered the bond markets pretty well in recent articles, but here’s another look at the past decade in the TNX, the ten year Treasury fund. Note the monthly close above the inverted H&S neckline. The target on that pattern is about 5.8%, well above the 30 year downtrend line for interest rates:

Below is the past decade in the IRX, very short term rates. This is where you see the waves of progressively lower FED induced rates rolling into and crashing upon the zero shoreline:

That’s about all I want to show for the last decade, it was one for the history books. As you look forward to the next decade you need to ask yourself if the problems that created that turmoil are gone or have they been fixed. My answer is that clearly they have not. The only thing left to do is to wait for the government to run out of their ability to take on and create more and more debt. That day is approaching, at some point the IMF, the same central bankers, will probably step in and offer to bail out the U.S. if only we agree to take a loan from their new “super bonds.” LOL, that is not a joke, but a sick and twisted form of modern slavery currently being hoisted upon the globe. It is my intention to see that that NEVER HAPPENS.

Since Friday was quite the rout for the last day of the year, let’s take a quick look at what’s happening shorter term…

The New Year is bound to bring some profit taking, the month of January has become a month to do so as gains from the prior year are booked. It may be that some of the large players are getting just a little bit ahead of the game.

Below is a one year chart of the DOW, non log. The majority of the year, since March, was spent building a rising wedge, a common wave B formation. The volume has been decreasing the entire duration of the rise, this is a clear sign that it is a bear market rally and not a true bull market where one would expect to find rising volume to confirm price. The RSI peaked back in August and has been diverging ever since. This is the largest RSI divergence that I can find of the past century. The weekly MACD, not shown, is rolling over from highly overbought conditions, a sign that a major top is nearing:

On the 3 month DOW chart below, you can see that on Friday prices descended back into the prior sideways range and closed the daily, weekly, monthly, and yearly candle below the lower boundary of that non log rising wedge. This was the last of the rising wedge hold outs to be broken, all the other indices, while rising are now well beneath their wedges. You can see that the daily stochastics are rolling over and have now exited overbought. The volume is simply pathetic and the rise above the flag is now just a throw-over, although I note that on the SPX the candle closed exactly on the top of the flag and did not make it back inside:

The VIX over the past 6 months has been forming a megaphone pattern of higher highs and lower lows. Since this pattern was entered from the top, it would be expected to reverse the direction and send this volatility reading higher. You can see the red lines I’ve drawn in a descending triangle that broke on Friday to the upside. This may signal that a trip to the top of the megaphone may have begun, but like all indicators needs confirmation by getting follow-through in the expected direction:

To those thinking that a real and honest economic recovery is underway, I believe that Supertramp wrote a song for you long ago…

Supertramp – Dreamer:

Happy New Year, everyone, and I sincerely hope your new year is better than any other!