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8/3/2019 October 16 Weekly Plan
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October 16, 2011
Liquidity CycleLast week I noted some hints from the components of the liquidity cycle that the market
might want to correct the rapid break and rally a bit which as it turns out way
underestimated what did happen. The weak sectors moved sharply and the fixed income
market gave back a decent amount too. The driver of this sudden optimism was theprospect that Europe might finally act. The chart below shows the rally of the 8 days off
the low, pretty impressive. ( That is the SPY etf even though the chart label says SPX )
The left chart below is the 10 yr yield which has now moved almost 50 bp off the lows, a
substantial move over any period but especially in 2 weeks. The right chart is the
liquidity indicator which popped above the congestion range implying the broad marketmay do the same thing.
The Bespoke charts below comparing the sectors components to their 50 day ma alsoillustrate the size of the bounce back.
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For the equities to keep moving higher the news out of Europe must remain hopeful of a
solution that really addresses the bank capitalization issue and yet imposes some losses
on investors in valueless sovereign debt.The liquidity cycle indicator has lost its momentum and temporarily has made a short
term up move, it has not broken the long term downtrend. But it would not take a lot
more rally to begin to change the picture. Economic statistics over the very recent period
have actually surprised to the upside which is also encouraging, as is improved sentiment.
But it will take hard decisions in Europe to really make the difference in the long termtrend in global equity markets.
The Environment Spreadsheet follows on the next page and following that a number ofcharts showing the generic 5 and 50 day vols and implied vols for several markets to use
as a plurality check.
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Environment
Bloomberg front month vol charts follow:
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Minneapolis wheat on next page
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Correlation is still running very high and plurality is very broad so I am not running many of
those charts in this report. 78% of stocks are above the 50 ma but only 31% are above the 200ma
so corrective action can still be supportive.
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Fixed Income
As the chart says the entire curve of the real yields on U.S. Treasury debt is now
negative. This is not normally a bullish condition for a currency. The liquidity this
indicates is supportive of equities and other assets, like gold but the threat of debt defaultis off setting the inflationary impact of the currency debasement.
Longer term the Dollar is still weak, major currencies below and gold next page.
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The Gold market is still a bullish trend, the global managers of paper money refuse
behave honestly or ethically and quietly persist in the impoverishment of the middle
class.
Europe:I have many negative impressions of the European leadership as a group. So far they havedone a rather good imitation of the Keystone Cops during the crisis but I have found and
exception. Richard Sulik is the leader of the opposition party in Slovakia and in an
interview withDER Spiegel he made more sense than most European leaders have during
the entire period of the crisis. I am pasting in an article by Grant Williams that quotes theinterview. The added comments are from Grant Wiliams.
________________________________________________________________________Richard Sulik, leader of the Freedom and Solidarity Party (SaS) which formed part of the
aforementioned coalition hardly helped matters:
(RT News): The average pension in Slovakia is less than 400 euros, Sulik declared last week.
The average pension in Greece is 1,400 euros three, four times higher.
Its impossible to explain to a Slovak pensioner that he or she has to contribute in the form
of higher VAT, for example toward Greek pensions, he said. Or toward Italian MPs
salaries, the highest in Europe.
The SaS, it has to be said, had a fairly compelling argument for why they chose to abstain from
the vote:
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(The Conversation): The argument by the Freedom and Solidarity Party in Slovakia is that they
have been penalised for having complied with the rules. You can imagine that argument
sounds very plausible to many Slovak voters because it was quite a painful process for
Slovakia to comply with the Maastricht Treaty criteria that created the common currency
no more than 60% debt to GDP and no more than a 3% deficit of GDP in a year.
Greece has consistently violated these conditions the Greek government hasnt even livedup to the conditions it accepted a year ago. Greece is a complete mess.
Who believes these policies have worked when Greece is in a worse state now than it was a year
ago?
In an interview with Der Spiegel in the days before the vote, Sulik made a hell of a lot more
sense than pretty much any of the other Eurocrats who had been running around shooting off
their mouths in the lead-up to various ratification votes:
SPIEGEL ONLINE: Slovakia has yet to approve the expansion of the euro backstop fund, the
European Financial Stability Facility (EFSF), because your Freedom and Solidarity (SaS) party
is blocking the reform. If a majority of Slovak parliamentarians dont support theEFSF
expansion, it could ultimately mean the end of the common currency.
Sulik: The opposite is actually the case. The greatest threat to the euro is the bailout fund
itself.
SPIEGEL ONLINE: How so?
Sulik: Its an attempt to use fresh debt to solve the debt crisis. That will never work. But, for me,the
main issue is protecting the money of Slovak taxpayers. Were supposed to contribute the
largest share of the bailout fund measured in terms of economic strength. Thats
unacceptable.
Right there, in one short sentence, Sulik hits the nail on the head for every can-kicking politicianaround the world who clings to the fanciful notion that increasing the debt load is somehow
going to magically cure the fundamental problem facing the world which is; Too. Much. Debt.
Just to make matters worse, Sulik then goes on to make even MORE sense when asked about
the fundamental underpinnings of Europe and refuses to fan the flames of fear when asked
about a possible conflagration:
SPIEGEL ONLINE: If the euro only causes problems, why doesnt Slovakias government just
pull the country out of the euro zone?
Sulik: I dont see the euro as the problem. Its a good project. Everyone involved can benefit fromit -- but only if they stick to the ground rules. And thats exactly what were demanding.
A look at the average net wages of the Eurozones 17 members (left) provides yet more grist tothe mill of dissent in Slovakia as she sits comfortably at the top of the list of low earners - just
above the profligate PIGS whom she is being expected to support. In fact, the average Greek
already earns over twice that of his (or her) Slovakian counterpart. Hardly seems fair now, does
it?
Thanks to Grant Williams of Things that make you go HMMMM
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Europe is far too reliant on Germany and the other strong countries for the various individualnations to be able to take care of their own problems - particularly if any localized bank
recapitalizations are to be in addition to the already pledged EFSF contributions by each nation
(left). What is far more likely is some kind of bazooka or shock & awe (to use two tired cliches)
approach using the newly-approved EFSF
If France had to recapitalize BNP and Soc Gen to the tune of 11 billionin addition to its 158
billion stake in the EFSF (as is widely suspected), it could well kiss goodbye to its AAA rating now
that the ratings agencies seem to have finally found religion (Italy & Spain saw downgrades this
week) and that, for a country currently running a debt-to- GDP ratio of 84%, would NOT be a
good thing.
Whether a station-to-station plan is in the works or not, it will rely on a nice, orderly procession
from one country to the next and I think it has been made abundantly clear over the last year
that Europe DOESNT do orderly.
There is absolutely no way that the Eurocrats can stop the markets turning their collective eyes to-
wards the next domino in the line at every point in the process. As they struggle to fix the Greeksituation, the markets have already done it for them and Greek 1-year bonds now yield 166%. Job
done.Next up? Whether the architects of a solution are ready for it or not, its Spain and Italy...and France from UBS
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Late Note:
Since penning this editorial on Saturday, it seems as though there has been some information
emanating from the G-20 Finance Ministers meetings in Paris, to whit:
Germany and France are spearheading a multi-trillion dollar shock and awe programme ex-
pected to be agreed next weekend and presented the following week at the G20 summit in
Cannes.
Hmmm.....That article seems to confirm that there is a plan about having a plan to discuss a plan
to be presented in Cannes. Responsibility for solving the Eurozone crisis has now officially been
turned over to Danny Kaye.
Until next week when, no doubt, everything will have changed again----- Grant Williams
China: Chinese M2 rate of change not yet encouraging for SHCOMP
And M2 vs. SHCOMP YoY change. Thanks toZerohedge.con for these charts
http://www.zerohedge.com/news/chinese-m2-growth-dropping-9-year-low-means-more-pain-store-shcomphttp://www.zerohedge.com/news/chinese-m2-growth-dropping-9-year-low-means-more-pain-store-shcomphttp://www.zerohedge.com/news/chinese-m2-growth-dropping-9-year-low-means-more-pain-store-shcomphttp://www.zerohedge.com/news/chinese-m2-growth-dropping-9-year-low-means-more-pain-store-shcomp8/3/2019 October 16 Weekly Plan
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