The Biggest Bear Trap In History

[The Masked Tulip]

Spot on commentary from the Jerusalem Post IMPO.

http://www.jpost.com/servlet/Satellite?cid...rticle/ShowFull

The orchestrated effort to convince the public that everything is under control is understandable. There is no doubt that psychology plays a major role in times like these, and that calming the public is a legitimate goal. So we don't have a problem listening to these optimist tunes - we just don't think it would be wise to actually believe them.

True, the massive capital injections to the banks - trillions of dollars pumped by central banks and governments - have stabilized the system for the time being. The banks' free fall is showing signs of hitting some kind of bottom. The question is whether they could survive the crash - and even if they could, whether another one is about to occur.

After almost three months of strong rallying in the world's stock markets, there seems to be some change in the air. More and more experts, including some of the most bearish, are claiming now that the "worst part is behind us." Top regulators, including the chairmen of the Fed and the IMF, sound confident that global economies will start growing again by the end of the year. Politicians in Washington, London and Tokyo are pumping more and more money into the banks, major industries and even to individuals, hoping to revive dead credit markets and crippled economies.

The orchestrated effort to convince the public that everything is under control is understandable. There is no doubt that psychology plays a major role in times like these, and that calming the public is a legitimate goal. So we don't have a problem listening to these optimist tunes - we just don't think it would be wise to actually believe them.

True, the massive capital injections to the banks - trillions of dollars pumped by central banks and governments - have stabilized the system for the time being. The banks' free fall is showing signs of hitting some kind of bottom. The question is whether they could survive the crash - and even if they could, whether another one is about to occur.

Bear in mind that the vast majority of the losses recorded so far by banks are related to the residential housing markets, with all the subprime garbage loans, poisonous financial derivatives and even loans to "prime" borrowers. But that is only one part, not even the biggest, of the huge credit sums the banks so happily pumped in the last few years. What happened to the loans given to the business sector? Commercial real estate? Credit cards? Foreign governments? There are many more trillions of dollars in the banks' balance sheets that are at serious risk. The banks are reluctant to acknowledge them, since they already suffer from a severe capital shortage.

The regulators, terrified by the horrible truth hiding in the financial institutions' books, are playing their part by letting the banks overlook the time bomb and by allowing shameful accounting practices, such as the outrageous decision to let the banks write down the value of their own debt without actually buying it from creditors.

The politicians are acting like a child playing hide and seek, closing his eyes and believing that no one can see him now. They think that by painting the situation with brighter colors through speeches and faked accounting practices, they can avoid the unavoidable.

But brilliant speeches and virtual reports cannot change reality. Neither can money-printing. Ask the Romans - they could tell us a lot about how inflation can kill empires. The reality is that banks in the US are practically ruined. Things are so bad that banks have even stopped foreclosing houses, since they already own millions of homes taken from defaulting borrowers, and they cannot get rid of them. In some cases the bank is willing to settle the debt and leave the property in the owner's hands for 15 cents to the dollar, and most of the borrowers can't pay even that.

The reality is that more than half a million people lose their jobs every month. The reality is that businesses are totally halting their purchases and are defaulting on their obligations in staggering numbers. Even the lucky ones who still have jobs are seeing their wages shrink and their net worth collapse, so they have stopped buying. The reality is that what we are seeing now is just the painful reaction to the bursting of the phony credit bubble that enabled us to consume and produce much more than we should have.

So believing that all this could be over after a year and a half seems naive to us. The current rally of the markets, ignited by the government's massive interventions and bailout plans, recalls in many ways the false recovery the US economy recorded in the first half of 1930, right after the market crash in the autumn of '29 and right before the harsh truth revealed itself by the summer of that year. There is a good chance that we are looking at the biggest bear trap in history.

This is not to say we can predict the future. What we do know is that in life, there are no miracles and no free meals You don't have to be a genius to understand that if the Fed has tripled its balance in less than a year, meaning it printed two new dollars for every single dollar in notes that existed a year ago - the value of the greenback will plunge.

That might ignite a new wave of rising commodity prices and a slide in all US financial assets denominated in dollars. Currency market will be shaken, gold will soar to unimaginable new records, bond and equity markets will collapse and the world will find itself in an even more terrifying spiral of panic. Murphy's Law never seemed as relevant as it does now. So many things can go wrong in today's environment that the best move is to assume they will, rather than hope they won't.

Hope is a very powerful thing. We hate to live our lives believing they are only about to get worse. Irrational optimism, wishful thinking and repression are not only common human behaviors, but possibly even define us as species. But don't fall for that. Sometimes you eat the bear, the old saying goes, and sometimes the bear eats you. Right now it seems the odds are in favor of the bear, so stay away from the forest.

[ARIMA]

Um.. technically that would be a bull trap. Thanks.

[duckwomanloulou]

Glad I bought gold today

edit

Edited June 9, 2009 by duckwomanloulou

[The Masked Tulip]

Um.. technically that would be a bull trap. Thanks.

Actually, it is a bear trap.... suckering in the savings of those who avoided the initial the crash. The bulls having lost their shirts in the initial crash.

That is what happened in 1929-32.

[getdoon_weebobby]

Actually, it is a bear trap.... suckering in the savings of those who avoided the initial the crash. The bulls having lost their shirts in the initial crash.

That is what happened in 1929-32.

im shocked how many people who have avoided the crash have piled in to shares/property. im still 100% cash havent touched a single share and await fear , capitulation and dispair. then the first home gets bought . i like the sound of 15p in every £ !!!!

Edited June 9, 2009 by getdoon_weebobby

[Timm]

Actually, it is a bear trap.... suckering in the savings of those who avoided the initial the crash. The bulls having lost their shirts in the initial crash.

That is what happened in 1929-32.

I agree with your assessment of the situation, but I think it's a bull trap too.

Those bears you are talking about are turning bull.

If they stayed bear and the market turned down again, they would be OK.

[Charlie Don't Surf]

Um.. technically that would be a bull trap. Thanks.

Maybe it's a neither trap

[Timm]

http://www.investopedia.com/terms/b/bulltrap.asp

[Bloo Loo]

Actually, it is a bear trap.... suckering in the savings of those who avoided the initial the crash. The bulls having lost their shirts in the initial crash.

That is what happened in 1929-32.

a bear trap is one that catches people who sold thinking the rises were short term, ie they beleived the boom had ended. they miss out as the boom continues.

a bull trap is on the downside of the boom and happens when the bulls think its all back on, but they are then caught out because the market continues to crumble

[ARIMA]

Maybe it's a neither trap

Let's just call it a troll trap

[The Masked Tulip]

im shocked how many people who have avoided the crash have piled in to shares/property. im still 100% cash havent touched a single share and await fear , capitulation and dispair. then the first home gets bought . i like the sound of 15p in every £ !!!!

But the analysis of the current upturn in the markets shows that very few individuals are buying shares. In fact, very few funds are buying shares. Even corporates are taking the opportunity to sell their shares in the upturn.

So who is buying?

Well, yes, some funds are buying but apparently the biggest buyer of shares are the banks... who are also the biggest shorters. But the banks alone do not account for the huge upturn in the markets and so, as many analysts believe, the central banks and Governments of the US and UK are actually driving this upturn.

It will get much messier before it begins to get better. Apparently, several times in recent weeks there has been unexpected buying of shares on the DOW in the last 15 minutes which somehow miraculously has stopped the DOW from closing down on the day. Who is doing the buying? The US Fed of course.

How long can the Fed keep propping up the markets? Not forever that is for sure.

[Bloo Loo]

But the analysis of the current upturn in the markets shows that very few individuals are buying shares. In fact, very few funds are buying shares. Even corporates are taking the opportunity to sell their shares in the upturn.

So who is buying?

Well, yes, some funds are buying but apparently the biggest buyer of shares are the banks... who are also the biggest shorters. But the banks alone do not account for the huge upturn in the markets and so, as many analysts believe, the central banks and Governments of the US and UK are actually driving this upturn.

It will get much messier before it begins to get better. Apparently, several times in recent weeks there has been unexpected buying of shares on the DOW in the last 15 minutes which somehow miraculously has stopped the DOW from closing down on the day. Who is doing the buying? The US Fed of course.

How long can the Fed keep propping up the markets? Not forever that is for sure.

gonna be fun on settlement day when grandpa opens the envelope and finds a scribbled IOU from Mr Bernanke.

[The Masked Tulip]

Two Ways to Deleverage an Economy

http://dailyreckoning.com/

The dumb money is fairly easy to spot. It’s the money that always shows up late to the party, wearing yesterday’s fashions. It watches TV and thinks the reality shows show reality…it thinks Ben Bernanke is a great economist…that the SEC protects investors from fraud and misrepresentation…and that Tim Geithner makes sure the economy keeps running smoothly.

It’s the dumb money that thinks you can correct a generation-long period of credit growth in 24 months…with less than 10% unemployment…

Stocks have now been in a rally for three months. The longer this goes on, of course, the dumber money gets. People come to think the bounce is a permanent bull market.

Yesterday, not much happened. Stocks held steady. Oil too. Gold fell $8…closing at $952. And the dollar rose to $1.39 per euro.

But while the dumb money has its eyes on the stock market, the smart money is watching the economy.

“Every smart trader I know is massively short the stock market,†says Jeff Clark.

The blogs are chattering about poor Lee Mozilo. He’s no Angelo, they say. The SEC claims he told investors that all was well in his company, Countrywide, while he was dumping shares.

We don’t know the details, so we wouldn’t rush to judgment. But our guess is that the SEC is trying to recover its reputation by putting on a few show trials. The SEC has a pack of watchdogs on the payroll. But somehow thieves stole every decent part in the junkyard without a single one of these mutts bothering to bark. Now, they’re indignant…and out for justice!

Did Mozilo do something wrong? We don’t know. But the question would never have come up if it hadn’t been for the crisis in housing debt. As long as housing was going up, everyone was happy with Countrywide’s business model. Yet didn’t everyone know that the mortgage finance business was a dangerous place to be at the end of a housing bubble? Didn’t the SEC know it, too? If we recall correctly, Mozilo said so himself…

But the SEC watchdogs slept through the biggest heist in history. And now the people who lost face and lost fortunes are eager to pin the blame on someone other than themselves.

But that’s just part of the whole process of deleveraging. That’s how capitalism works. People lose money…then they lose jobs…and houses…and businesses go into chapter 11 and a few of their CEOs go to jail.

All that takes time. And betting against deleveraging is probably not a smart thing to do. Not until it’s over…which is not until the leverage built up in the bubble era has been removed. And with total debt levels at 370% of GDP…and the government adding even more debt…we’re a long way from there.

But what do you do, dear reader? Buy Treasuries in anticipation of another crash in stocks? Or mortgage your house, long-term fixed-rate, in anticipation of fed-caused inflation?

Ah, there’s the tough question. We know where the dumb money is…but where’s the smart money? Jeff Clark says it’s short stocks. But there’s some very smart money that is betting that the government will turn this around. They’re putting their money on inflation…or even hyperinflation. Our old friend, Marc Faber, for example, says he is sure the United States is headed for hyperinflation. If so, shorting stocks may not be such a shrewd move. Stocks could soar too – as investors try to buy anything and everything that didn’t have dollar signs on it.

You see, there are two ways to deleverage an economy.

The obvious way is the traditional, honest way – in which people actually try to pay their debts. This causes the problems we see as falling asset prices, bankruptcies, joblessness and the other hallmarks of a Great Depression.

But the feds have their hearts set on preventing a depression. And they’re doing it the only way they can…by the old ‘hair of the dog’ technique. The economy suffers from too much debt – so they’re going to give it more! Much more. The whole pooch! The whole kennel! Then, they round up every stray mongrel in town. What happens when they run out of dogs? Well…that’s a discussion for another day.

We have had many laughs following the feds and their war against capitalism. They’re gambling an amount nearly equal to the entire U.S. GDP to try to prevent people from getting what they have coming. In the process, they’re almost certain to make a mess of things.

The smart money is betting that they fail to stop deleveraging. But the very smart money is betting that they create a new, worse problem – inflation, maybe hyper-inflation. Inflation reduces the real value of debt…but in a perverse and unpredictable way. Debtors don’t pay their bills; savers pay them. Inflation – like bailouts – rewards the least responsible players…those who have gotten themselves heavily in debt…and punishes those who have done the ‘right’ thing. As Germany saw in the ’20s, it de-stabilizes the whole society…leading to extremely unwelcome outcomes.

Whole article is worth a read.

[Dr Renter]

The housing bear trap was in 2005 when prices started to level off. It looked like the top of the market until the idiots at the BoE started to drop interest rates, thus extending the boom for another 2 years.

[SarahBell]

Can a bear trap be a bigger bear?