Denniger Expecting A Crash - One For The Chartists

[interestrateripoff]

http://market-ticker.org/akcs-www?post=167162

Investing is all about trying to determine a longer-term direction for the market such that risk and reward align in some meaningful way.

Yesterday, on Blogtalk, I stated that I was pulling all of my long-term investments that were market-related, and for an indeterminate time forward I would be only short-term trading this market.

That deserves an explanation, and toward this end, I would like to present the following 10 year weekly chart. (see attachment)

The regular "trace" is the S&P 500 price. The white trace is the 10 year Treasury yield as a comparative.

You need to pay attention to this.

"This time it's different" is often said.

It is almost always wrong, and believing in it will almost always make you broke.

Here's reality folks. Over the previous 10 years the TNX has never declined meaningfully without the S&P 500 following it, and declining to near or below it on a comparative basis.

The TNX almost always leads on declines too, sometimes by as much as six months.

Well, it's been six months.

In 2007, the TNX peaked in late June, after which it began a dive. The market peaked in the middle of October of that year at 1576. The decline essentially reached the comparative bottom.

Now the TNX has peaked the first week of April of this year, and is quite close to the March 2009 lows. Yet the S&P, after it took a swoon, has recovered.

Exactly as it did in 2007.

We all know what came next.

The same thing happened in 2000, when the market peaked and fell apart. Again, the TNX led. It in fact peaked almost exactly at the end of the year in 1999. Three months later "it" began.

The TNX move today, as I outlined in Ticks in real-time, broke a triangle formation that should have moved higher. That was a continuation pattern. Instead, it broke the wrong way - hard - even before The Fed announcement. After The Fed announcement the move was accentuated dramatically.

This is not a sign of "improvement" nor is it a sign to "buy stocks", as Cramer claimed today after the FOMC announcement. To the contrary. It is a strong signal to sell everything and get the hell away from the stock market. It is an indication that the market should, if it follows past precedent, decline by as much as 30%, and perhaps more.

The market usually leads the TNX when it bottoms and the market heads higher.

The TNX always leads the market when it declines.

The 2yr is at all time record low yields.

Lower than during the decline in 2008 and 2009.

This strongly implies that the March 2009 "666" low in the S&P 500 is NOT a "generational low", AND IT WILL IN FACT BE BREACHED.

The bond market is very, very rarely wrong folks. When it disagrees with equities you're a fool to believe the equities, unless of course you hate money.

This has always been true, and it will always be true.

The market is "betting" that Bernanke will come in with more "Quantitative Easing", or even better, that it can force Bernanke to implement more "Quantitative Easing." Japan in fact did this, and has continued to do so.

Where was the all-time high in the Nikkei 225, and where does it trade now? Did it ever get back to those highs?

No.

Does Japan have a massive foreign account deficit? No - they have a foreign account surplus. Their debt is owed to Japanese - not to foreigners, as ours is.

"Quantitative Easing" is a scam. It's yet another sop and fraud to allow the government to deficit spend "allegedly" without consequence. It covered $1 trillion of deficit spending the last time. If they do come in again all they will do is cover another $1 trillion in deficit spending by the government, while your actual disposable income in terms of goods and services will see yet more declines, just as occurred from 2000-2010.

That's all folks.

The "scam" part of it is that there is no way The Fed can ever reduce it's balance sheet once it does this, because to do so the government will have to decrease spending by an equivalent amount to that "eased." It will never do so. Not voluntarily, anyway. Gold is moving higher on the bet that the attempt to "allow" continued government spending will fail and ultimately the government will be forced to default (either literally or through massive unsterilized money printing that destroys the currency.) I don't think that will prove correct - I think our foreign creditors will pull our credit card first. But that's what Gold is saying, and if Gold is right, then America as a nation is finished, and our government will eventually dissolve either into outright tyranny or civil war and you will be THROWING your gold at people to defend yourself.

The only way The Fed can "fix" the market and economy in the intermediate term is to raise rates. That is, remove liquidity and force rates higher. Doing so will cause the TNX to rise along with the rest of the yield curve.

It will also shut down the Federal Government's deficit spending binge immediately as they will not be able to fund both that binge and the (higher) interest payments on the debt.

Bernanke is not going to do it.

Not now, not ever, unless he is forced by external events, and I believe eventually he WILL be.

Unlike Japan we cannot play this game as they did, simply because of our foreign account deficits. Japan got away with it for as long as they did for that reason, but even their capacity to do so is becoming strained.

The simple truth is that Bernanke can't pull liquidity at the present time because the government is spending all of its tax receipts paying for entitlements.

Even if the economy "recovers" he still can't do it because doing so means that interest expense would more than double, and the government doesn't have the money now and won't even under a rosy economic recovery scenario.

This is an environment in which it makes sense to own stocks as investments?

The hell it does.

This is a classic "death spiral" situation and equity valuations are in a severe bubble as a consequence of all the government "cheese", despite "appearing" to be "cheap."

Bernanke has bricked himself into the outhouse and he knows it. Thus, all the "soft threats" to "quantitative ease" and all the screaming from both the left and right for yet more of it - both sides know exactly what sort of box they're trapped in, and it's a box of their own design.

Oh sure, there can be short-term pops in the market. They might even last months. There could even be parabolic moves upward. The Nikkei has had several of them.

But you cannot invest in them.

You can trade them, and if you have the time and patience to do so in a dispassionate fashion then have at it, but you cannot invest in equities, nor can you buy any coupon (bonds) with any sort of meaningful duration.

If you do, you will ultimately be destroyed.

Those pension funds and other investors who are "reaching for yield" and "reaching for risk" at the present time are making the biggest mistake of their lives. It is inevitable that this strategy will fail and when it does what you formerly thought was "safe" - whether it be your pension, your Social Security, your Medicare, your kid's prepaid college education - all of it will be gone.

This preoccupation with Bernanke's folly is not only unhealthy, it is certifiably insane.

The TNX does not lie folks.

It has not in the past - not even when "Easy Al" was running the joint and handing out money like candy. Nor has it this time, with Bernanke doing the exact same thing Easy Al was doing.

Policies haven't changed and until they do neither will market relationships.

Act as you deem best, but ignore the bond market at your considerable peril.

It is rarely wrong.

Is his analysis here correct? The chart posted appears to show a correlation.

[kilroy]

http://market-ticker.org/akcs-www?post=167162

Is his analysis here correct? The chart posted appears to show a correlation.

damn doom-mongerers talking down the market.....

[headrow]

I sold up two weeks ago thinking the market had peaked and missed out on this recent rally , even sold my Wellstream shares which went up 30% yesterday which is a bit of a £10k sickener , but i'm firmly of the opinion that the S&P will see three figures well before it will be 1300 as most people they interview on Bloomberg seem to think.

Its a horrible feeling selling up and watching the shraes you had continue to rise but the feeling of holding and watching them plummet is far worse.

[Chugger]

The only way The Fed can "fix" the market and economy in the intermediate term is to raise rates. That is, remove liquidity and force rates higher.

...

Bernanke is not going to do it.

Not now, not ever, unless he is forced by external events, and I believe eventually he WILL be.

What kind of "external events" would it take?

[Toto deVeer]

Denninger was right leading up to 2008, which gave him a bit of street cred, for a while, but since then he's been wrong, wrong, wrong.

I stopped reading his blog months ago. Of course the market is going to decline. Even a stopped clock is right twice a day. The question is when?

[Ponzi]

Me too Headrow.

Pension is 100% Cash.

It seems obvious to me that Bernanke and CBs are mad, because they are doing the same thing repeatedly and expecting a different result. The debt-consumption model is at the end of the road. We've reached saturation point.

[Georgia O'Keeffe]

http://market-ticker.org/akcs-www?post=167162

Is his analysis here correct? The chart posted appears to show a correlation.

I like his general analysis, things are clearly just creating bigger and bigger problems, at some point something "unexpected" will happen and it will go pop. I imagine it will be sov defaults, next year some of the PIIGs and the following year Japan probably.

As to the market i am still currently bullish unti the April highs get taken out, although the safest play is to wait on the sidelines, if those highs are taken out i will go ultra bearish. Ultimately i still believe the FTSE and DOW are likely going to 3 figures over the coming years

[The Masked Tulip]

I like his general analysis, things are clearly just creating bigger and bigger problems, at some point something "unexpected" will happen and it will go pop. I imagine it will be sov defaults, next year some of the PIIGs and the following year Japan probably.

As to the market i am still currently bullish unti the April highs get taken out, although the safest play is to wait on the sidelines, if those highs are taken out i will go ultra bearish. Ultimately i still believe the FTSE and DOW are likely going to 3 figures over the coming years

3 figures?

[Georgia O'Keeffe]

3 figures?

unfortunately yep, thats - - -, hopefully it doesnt happen but the market and the economy at least by my limited analysis has developed pretty correctly up to now for this since 2007 at the very least it would should not be ruled out and unexpected if it were to happen. I think houses are a complete side issue really, unimportant in the scheme of things, they were just the token of choice this time

Edited September 22, 2010 by Tamara De Lempicka

[azogar]

I get confused by Denninger, he seems to change his views quite a lot;

in late 2008 he was making dramatic videos warning of hyperinflation, then in 2009 he tells me the $ will rule supreme and now i must a await a crash

well i guess he will be right about something - don't know what though

[JustYield]

10% off before Dec, then 30% melt-up, then 50% off from there. Denninger will get caught short in the middle and get his knickers in a bunch and all shouty and red about it. Folks.

[azogar]

always been a deflationista afaik

[okaycuckoo]

always been a deflationista afaik

I've followed Denninger from the start, when he was an inflationista. He was turned to the deflation side by the arguments of an investment banker on his forum (her name was "nothing" - because nothing comes from nothing - and she got kicked off the forum when she ultimately disagreed with him! I got the impression at the time that she lost her job - it was all a bit dramatic.)

His predictions have been good, but substantially early. He was looking for collapse of a big bank in 2007, and was a few months early on the indices in summer 2008. In early 2009 he called a "rip your face off" rally, but only expected it to get to SPX 1050. His calls on $ parity with £ & € look way off ... for now.

He seems to be returning to a price inflation position while maintaining his overall deflation thesis. I guess his hostility to gold annoys alot of people.

[_w_]

http://market-ticker...www?post=167162

Is his analysis here correct? The chart posted appears to show a correlation.

Be very mindful of the permaXs. He is one angry man who wishes everything would collapse so we could start again (and I can sympathise with that).

Although his reads are entertaining (in a twisted sort of way), his predictions are useless.

[interestrateripoff]

Be very mindful of the permaXs. He is one angry man who wishes everything would collapse so we could start again (and I can sympathise with that).

Although his reads are entertaining (in a twisted sort of way), his predictions are useless.

I'm amazed his head hasn't exploded, I always imagine that he has a huge stack of keyboards under his window that he's flung out due to them not taking the punishment of his typing.

[_w_]

I'm amazed his head hasn't exploded, I always imagine that he has a huge stack of keyboards under his window that he's flung out due to them not taking the punishment of his typing.

It's the spit on his screen when he's typing that I keep visualising when I read him. Very disturbing.

He should get into politics, I think that's really where he belongs.

[Meat Puppet]

thanks for that.I tend never to critiscise too much because timing anything in marekts,especially in these times of heavy algo/hft trading is difficult.on the whole KD has a reasonable record on getting the broad picture right and imho that's all you can really expect.his new years predictions are generally honestly assessed.

I generally think anyone who saw this whole thing coming deserves credit and that therefore exlcudes about 97% of the population.

Personally,I see price inflation and credit deflation.

This one's obvious. All the money to be made or lost is betting on the former.