Greece's Debt Crisis: What's in Store for the Rest of the PIIGS?

Can you imagine the chaos that would erupt if T-bill rates were to rocket from 5% to 19% in one month in the U.S.?

Something close is happening right now in Greece, Portugal and Spain -- and the contagion is spreading. EWI's analysts have been keeping their subscribers one step ahead of the curve of this sovereign debt crisis for months.

Excerpted below is some of EWI's prescient analysis about the growing crisis in Europe. As you'll see, the analysis describes what's happening in Europe now -- three months ago.

Excerpted from the February 2010 issue of Global Market Perspective.

High levels of global debt are both financially debilitating and deflationary because they commit scarce cash to servicing interest payments. Up until now, most sovereign credit defaults occurred in emerging-market countries, such as Argentina and Russia. The deflationary tide, however, is starting to lap up against more developed Eurozone economies.


The chart shows the value of credit default swaps -- an instrument similar to an insurance contract that pays holders (if they are lucky) in the event of default -- for Greece, Portugal, Spain and France. In recent weeks these contracts have soared, with credit-default swaps on Greece’s and Portugal’s debt already surpassing the January-March 2009 extremes established in the latter part of Primary degree 1 down.

Obviously, the market is growing more skeptical that Greece can pay its debts, so the cost of protecting against default is rising fast. Greece’s budget deficit is 12.7% of gross domestic product, and Portugal faces a budget shortfall that’s more than twice the European Union’s limit. Traders are now buying default protection on sovereign debt at a rate of more than five times that of specific company bonds. “Greece’s neighbors would ‘step in’ to prevent a debt default to avoid ‘a problem for the whole of Europe,’” a Tokyo-based bondsalesman says. Maybe so, but who will step in to bail out Portugal, Spain, the next sovereign default or the one thereafter?

The world is running out of money to service its mounting debts, and this chart simply depicts the front edge of the next great wave of credit contraction, which will sweep into more established countries throughout Europe and eventually to the United States.

Eduard Hamamjian
GeaSphere

Would the U.S. be Better Off Not Spending -- Like Latvia?

Contributing writer Jason Farkas upends the argument that governments and central banks have much influence on markets in the April 2010 issue of The European Financial Forecast.

Here's how he poses his challenge:

Most investors, and government officials, seem to be under the delusion that government spending produces higher stock markets, inflation and recovery. But if that’s true, then spending cuts should lead to the opposite, right? We know of one region that implemented spending cuts in response to the 2008-09 global recession.…

That region includes four Soviet states -- Latvia, Estonia, Lithuania and the Ukraine -- all of which had major GDP declines in 2008 and 2009. In response, these countries reduced government spending. Such actions were the complete opposite of fiscal policies like those of the United States, which increased spending during the crisis.



With a few paragraphs of analysis and this one simple chart, Farkas tells the whole story. The NASDAQ OMX Baltic Index, the regional equity index, has more than doubled since March 2009. He discovered that although government responses to the crisis were completely opposite, these Baltic and U.S. markets have rebounded similarly. This finding, he suggests, strengthens the idea that the true driver of stock markets is psychology, not government policymakers.

Eduard Hamamjian
GeaSphere

Will the Bear Market End the "War on Drugs"?

Marijuana legalization has come a long way (in a short time), baby


In 1996 California voters approved Proposition 215, which extended legal protection to doctors who recommend and patients who use marijuana for medical reasons. This inspired the "medical marijuana" movement, though it made only sporadic progress in the decade that followed. Beyond a few mostly Western states, the movement found meager legislative support.

Until around 2007, that is.

In 2007 and 2008, legislatures in 27 states considered bills related to marijuana -- each one sought to relax or eliminate the current penalties for use and/or possession in those states. The trend continued into 2009 and 2010. This past March saw the most far-reaching legislative proposal yet, again in California: the state legislature will vote on a bill to allow adults over 21 to personally possess and cultivate marijuana. It would also implement a regulatory regime that taxes pot sales by licensed vendors.

The trend itself may not be news to you, even if you don't know all the particulars. This past January, an ABC News/Washington Post survey found that 81% of Americans support the legalization of medical marijuana (up from 69% in 1997). The same survey found 46% support "legalizing small amounts of marijuana for personal use" (up from 22% in 1997).

Still, you may not have gotten the memo about this past Tuesday (April 20) and the event known as 4/20, aka "Pot Day." Participants made a public show indeed of how much this day means to them: behold the crowd gathered for the occasion on the campus of the University of Colorado.

This apparent willingness toward tolerance and use also extends to controlled substances which create clouds only a user might see. Earlier this month The New York Times reported the experience of a retired clinical psychologist who was deeply depressed while going through treatments for kidney cancer:

"Nothing had any lasting effect until, at the age of 65, he had his first psychedelic experience. He left his home in Vancouver, Wash., to take part in an experiment at Johns Hopkins medical school involving psilocybin, the psychoactive ingredient found in certain mushrooms."

The article said that one year later, the gentleman's "profoundly transforming" hallucinogenic encounter had helped him "overcome his depression." What's more, his story is by no means unique: "Researchers from around the world are gathering this week in San Jose, Calif., for the largest conference on psychedelic science held in the United States in four decades."

Now, please know that I do not wish to make light of cancer, depression, or the taking of psilocybin. My purpose is not to condone or condemn pot smoking (okay, I did inhale… but that was a long time ago).

Instead, I want to show that the timing of this trend is no accident. Above I noted that 2007 began a measurable change in attitude -- that is, a change in social mood.

The July 2009 issue of The Socionomist published Euan Wilson's "The Coming Collapse of a Modern Prohibition," which showed how the large trend that now drives the financial markets also drives public sentiment today regarding marijuana. Sound far fetched? Well, the analysis and charts in the article draw a clear and persuasive parallel with the repeal of the 21st Amendment (alcohol prohibition), as part of a survey of prohibition/repeal efforts in the 20th century.

Eduard Hamamjian
GeaSphere LLC

I Herd, You Herd, We Herd

In financial markets, the crowd is the perceived leader, but it comprises nothing but followers.


One of the fundamental revelations of the Elliott Wave Principle is that investors herd.


For any thinking, independent person, that's a hard idea to accept. The Socionomics Institute's Alan Hall recently explained herding in an interview with Esquire magazine, and:

"People do hate this theory, Hall admits. Nobody wants to think that he's engaged in 'pre-rational survival behavior,' that he's no smarter than a gnu on the Serengeti, that rumors and movies and hemlines and even politics are just our way of sniffing the wind -- that history itself is just a glorified herding pattern."


But as hard as it is to swallow, let me give you an example of herding behavior that I myself recently engaged in -- perhaps you have too.

The other day, my wife and I went to a concert. We parked farther away from the venue than we would have liked -- so far, in fact, that we couldn't see the place, and it took us a minute to figure out which direction to go. We weren't the only ones trying to save a buck on parking -- there were 10-15 other people locking their cars.

The concert venue sits in the middle of a busy downtown area. I'd been there only once before and remembered having trouble finding it. Others have probably felt the same way -- I say that because as we all were leaving the parking lot, everyone kind of, sort of... well, formed a herd. A few people toward the front looked confident enough in the direction they'd chosen. The rest of us followed. We figured the ones upfront knew where they were going.

As we walked -- this group of people stretched along the sidewalk for half-a-block -- it occurred to me that if those at the front suddenly stopped, or turned into a bar, then my wife and I and most others in the group would likely feel lost. Yes, we would have kept going to save ourselves the embarrassment. But we would do so without really knowing where we were going, and only hoping to get there in time.

That's when I wished I had my TomTom GPS navigator with us.

It's the same in investing. There are stock exchanges in New York, London and other major cities. There are financial experts out there who seem confident about the market's direction. The rest of us, well... We watch, we listen, we share our own viewpoints -- but ultimately, most of us follow. When stocks go up -- "they are buying!" -- we buy. When stocks go down -- "they are selling!" -- we sell. In the absence of information, we rely on behavior of others.

Here's an important question, though. Walking to the concert, we could see our "leaders." But who "leads" investors? Here's how Elliott Wave International's founder and president Robert Prechter answered that in his May 2009 Elliott Wave Theorist:

Market Herding
Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do.

Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions.

Another term for "the mood of the herd" is social mood. It changes according to the patterns R.N. Elliott first described in the 1930s. These patterns reflect social mood changes -- and in turn make financial markets predictable.

Eduard Hamamjian
GeaSphere LLC

The US Economy Has Recovered: Hip, Hip, Hooray! April Fools

Our charts reveal the true progress of stock market growth.

On Thursday (April1) the Dow Industrials continued to flirt with the 11,000 level, and held tight to its much-exalted 18-month highs. And according to the mainstream experts, the "Green Shoots" of recovery have popped up on the US economic soil like pink flamingo yard ornaments signifying the start of a new bull market. Here, this April 1 news item reads: "Bulls Sipping April Fuel." (MarketWatch)
This has to be some kind of April fool's joke. Because in reality, the regenerative "fuel" in the US economy's engine couldn't run a lawn mower. Ipso Facto(s) -- these recent stats:
In January, employers slashed 23,000 private sector jobs as opposed to the widely expected creation of 40,000 jobs.
On March 31, Moody's Investors Service downgraded five major banks in Greece to confirm the deterioration -- not improvement -- of the country's debt crisis.
From December 2009 to January 2010, the S&P/Case-Shiller Home Price Index rose a paltry .3%. The increase did nothing to erase the fact that home values are still 30% below their July 2006 peak.
February 2010 saw the fourth consecutive drop in new home sales to the lowest level since such records started in 1963.
US Treasuries in March suffered their first monthly loss for the year, while the 10-year yield stands at its highest level in TEN months.
Despite a modest drop, US unemployment still stands at a dreadful 9.7%
The much-celebrated rise in fourth-quarter Gross Domestic Product was largely driven by the temporary fixes of Federal bailouts and inventory declines, NOT sustainable trends in consumer spending, business investment or employment growth.
So far in 2010, the Federal Deposit Insurance Corporation has dissolved 41 US banks. US lenders are collapsing at the fastest pace in 17 years while the number of banks on the FDIC's "Problem" list has climbed to its highest level since 1992.
The list goes on -- suffice it to say: The mainstream experts will explain away the upbeat performance in stocks via a feather of good news, EVEN IF it means "shrugging off" a two-ton elephant of negative data. And in the end, their analysis becomes a matter of convenience and crowd appeal -- NOT accuracy.
For that, the March 31 Short Term Update (STU, for short)steps in with an eye-opening account of the real health of the US stock market. In this publication, our analysts present a series of charts that reveal how the market's stack up against sure-fire measures of momentum, strength, and wave structure.
Here is a partially reprinted version of one of those charts: the DJIA, Daily versus NYSE Daily Volume since March 15.



As you can see in the top panel, the Dow registered four consecutive up closes in the final week of March. And, in the original STU chart, our analysts show whether the rally in prices was matched by an increasing volume; a bullish signal.
Also, Short Term Update presents a compelling snapshot of the S&P 500 versus the Percentage of S&P 500 stocks above their 10-day moving average since August 2009.

Eduard Hamamjian Managing Director
GeaSphere LLC

Blogger Buzz: Monetize!

Blogger Buzz: Monetize!

DEFLATION IS HERE

Think back to the fall of 2007. The deflationary "liquidity crunch" that over the next year-and-a-half cuts the DJIA in half, decimates commodities, real estate and world markets is only starting. Almost no one believes that the crash is coming -- to a large degree, because everyone is convinced that the U.S. Federal Reserve Bank, with Ben Bernanke at the helm, will never allow deflation to happen: It can just print money!

You cannot pick up a newspaper, turn on financial TV or read an economist’s report without hearing that the Fed’s latest discount-rate cut is bullish because it indicates the Fed’s decision to “pump liquidity” into the system. This opinion is so completely wrong that it is hard to believe its ubiquity.

First of all, the Fed does not “decide” where it wants interest rates. All it does is follow the market. Figure 17 proves it. Wherever the T-bill rate goes, the Fed’s “target rate” for federal funds immediately follows. That’s all there is to it.





If you refuse to believe your eyes, then listen to the chairman; Alan Greenspan is very clear on this point. On September 17, a commentator on CNBC asked, “Did you keep the interest rates too low for too long in 2002-2003?” Greenspan immediately responded, “The market did.” Rates were not “too low” or the period “too long,” either, because the market, not the Fed, made the decision on the level and the time, and the market is never wrong; it is what it is. If investors in trillions of dollars worth of U.S. Treasury debt worldwide had demanded higher interest, they would have gotten it, period.

Second, falling interest rates are almost never bullish. All you have to do to understand this point is look at Figure 18.





Interest rates fell persistently through three of the greatest bear markets in history: 1929-1932 in the Dow, 1990-2003 in the Japanese Nikkei, and 2000-2002 in the NASDAQ. The only comparably deep bear market in the past 80 years in which interest rates rose took place in the 1970s when the Value Line index dropped 74%. Economists all draw upon this experience, but they ignore the others. Today’s environment of extensive investment leverage and an Everest of debt in the banking system is far more like 1929 in the U.S. and 1989 in Japan than it is like the 1970s. Why is a decline in interest rates bearish in such an environment? Because it means a decline in the demand for credit. When people want less of something, the price goes down.

The recent drop in rates indicates less borrowing, which means that the primary prop under investment prices -- the expansion of credit -- is weakening. That’s one reason why stock prices fell in 2000-2002 and why they are vulnerable now. This is the opposite of “pumping liquidity”; it’s a slackening in liquidity.

Eduard Hamamjian
GeaSphere LLC