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Posts tagged ‘www.wealthbuilder.ie’

Market Brief

Wealthbuilder.ie

22nd. October 2010

 Getting Some Perspective

From a Dow Theory point of view this is the situation as I see it. The market is giving very strong signals particularly on the Transports side. My key break point is 5265 to give the first indication that the new Bull Run has commenced. We are currently at 4735. Near but not quite there. My key break point on the Dow Industrials is 13566. WE are currently at 11146 some 2420 points away.

 From a purely momentum perspective if the current positions on the Dow Transports and the Dow Industrials are solidly broken up through, even though the market is very overbought (based on fast and slow stochastics and the McClennan Summation index) it will very bullish short term. This situation is corroborated by price action on the NASDAQ and the S & P.

 As we are currently down the line on a fairly positive earnings season and it is understandable that when it ends there should be a correction, but if it proves to be mild it will offer an excellent buying opportunity to participate in your favourite value and momentum targets.

  Dow Transports: Weekly

 

 

In 2014 Ireland’s GDP will be 90 billion a drop of 25%..

Standard Multiplier Effect.

Definition: Fiscal Multipliers

Multipliers can be calculated to analyze the effects of fiscal policy or other exogenous changes in income and spending, on aggregate output.

For example, if an increase in German government spending by €100, with no change in taxes, causes German GDP to increase by €150, then the spending multiplier is 1.5. Other types of fiscal multipliers can also be calculated, like multipliers that describe the effects of changing taxes (such as lump-sum taxes or proportional taxes).

Figure 1 presents estimates for the historical effects of shocks to government purchases on output. For each period, we consider a policy shock equal to 1% increase in government spending and report a dollar increase in output per dollar increase in government spending over 20 quarters (see the paper for details).

Figure 1. Historical multiplier for total government spending

GDP (purchasing power parity): (Source CIA World Book)

$172.5 billion (2009 est.)

country comparison to the world: 57

$186.7 billion (2008 est.)

$193.4 billion (2007 est.)

note: data are in 2009 US dollars

Euro conversion rate @ .74 (Approx) Means Irish GDP is currently Euro 120 Billion.

Thus using an average multiplier 2 of  means that if the government takes 15 billion out of the economy over the next four years the Irish GDP will fall by 30 billion. This means that in 2014 Ireland’s GDP will be 90 billion a drop of  25%.. This “collapse” in an economy  that is already weak will turn a “recession into a “depression”. This will mean higher unemployment, lower VAT, lower corporation tax, lower local government and city rates, major business closure and great stress on social services.

http://www.wealthbuilder.ie

“A Guarantee Too Far”

 

“The Irish Economy Collapses As A Result Of The Global Financial Crisis.”

  Currently the Irish economy is in freefall following the collapse of the real estate market that had expanded ten fold in the decade from 1997 – 2007. The reasons for this “Celtic Tiger” boom are many but in the main reasons it arose are due to the following:

 

  1. A.    Ireland’s entry into the Euro allowed Irish banks access to unparalleled pools of cheap credit.
  2. B.     Ireland then had a low cost base.
  3. C.    Ireland had an unusually well educated workforce.
  4. D.    The integration of Europe brought many foreign companies to Ireland.
  5. E.     We introduced a most favourable corporate tax structure for international transfer pricing.
  6. F.     Wage rates rose at unprecedented levels due to job growth and a new liberal taxation policy.
  7. G.    The “originate to distribute” banking model increased banking liquidity to unprecedented levels.
  8. H.    “Social Partnership” brought industrial peace after many decades of instability.
  9. I.       The Northern Ireland “troubles” were finally resolved and the country had true peace which had eluded it for over four decades. These troubles had artificially repressed the country financially. The arrival of peace engendered a new positive attitude and an economic outburst.

 

 

            Due to a lack of government regulatory control and strategic foresight taxes from an unsustainable property base were used to fund a bureaucracy that is now overpaid and over extended  and is in severe danger of bankrupting the country for generations. As with many western democracies the executive system is proving incapable of making the tough choices necessary to stabilise the destructive spiral of debt interest compounding on debt principal.

 

            However, apart from the reality of supporting a burgeoning government and semi-state bureaucracy, the Irish government made a particularly disastrous mistake in the autumn of 2008 when the financial catastrophe first broke. In a mid-night crisis meeting, at Farmleigh (the former mansion of the Guinness family which now serves as a luxury bolt-hole for Irish elites)  the department of finance cajoled the ruling Fianna Fail party in power into not only guaranteeing banking deposits but also guaranteeing all bank bondholders. Thus far, two years on, for one lone particular financial institution called “Anglo Irish Bank,” the bill for this “guarantee too far” is now 36 billion Euros and rising. No other government in Christendom has provided such a windfall to the privileged bondholder elite. Under this guarantee as bonds mature the holders are being paid off, in full, instead of for cents on the dollar. As long as this guarantee remains in place the country will continue to be fleeced. As a result of this largess the price on Irish government borrowings has rocketed to 6.6% almost twice the German bund rate. This situation is making a mockery of the concept of a “common Euro currency”. Increasingly the Euro is being seen as an exchange rate mechanism rather than as a true currency.

 

            As with Portugal and Greece in Ireland the economic situation on the ground is becoming desperate. The main banks are basically insolvent and unable to lend. Capital expenditure by the government departments has stagnated. Taxes are rising to pay for the bloated interest charge on ballooning foreign borrowings. Business cash flow has collapsed and credit is non existent. Many enterprises now no longer accept cheques and insist on cash or payment through credit or debit cards. Money has become very scarce. It is the greatest crisis the country has faced since the 1921 Irish War of Independence. Unfortunately the media has failed to highlight this reality and many politicians and banking executives act as if this crisis is just a normal credit cycle event. They actually believe that soon Ireland will return to the boom years. They plead that all we have to do is wait the situation out. This type of complacency is preventing party leaders from taking the radical actions necessary and as each month passes the government borrows an additional 2.6 billion just to fund day to day expenses. Soon government borrowings will be over 100% of GDP and with exploding interest charges, increasingly taxes are simply being used to pay off foreign bondholders. Increased taxes are contracting the economy further and so the death spiral of debt is squeezing the life out of day to day commerce. Business is collapsing under a deflationary depression while bureaucracy is being sustained through misguided political policy. Ireland has become a socialist nightmare over-night.

 

What Ireland now faces is a highly competitive, low cost, low credit, web-interconnected, transnational and level-taxation based environment. Ireland must grow up and move on. It is time for fresh ideas and fresh action. It is time for leadership, courage and vision. It is time for affective sound bites to be replaced by effective strategic and tactical practicality. Hopefully the Irish people will wake up from their consensus trance and force the political elite to stop bailing out corrupt banking institutions and start to cut its public expenditure budgets. Enterprise not bureaucracy must be championed and its educated young workforce given hope rather than an emigration ticket. Whether this wake-up call will be headed is anybody’s guess. Increasingly the trend in Euroland is for Brussels to call the shots over local “sovereign” parliaments. In this crisis this development has turned out not to be beneficial. Local politicians have thus opted to pass the buck rather than courageously face up to the challenges. However, in Ireland it would appear an end game is shaping up. There is a limit to the level of borrowing the country can run up particularly with exploding interest costs. Should the Irish political system continue to prove itself incapable of restructuring its bloated public service expenditure it is inevitable that at some stage the IMF, probably through the auspices of the European Central Bank, will wade in and directly instruct the Irish Department of Finance to act. From my point of view the sooner this happens the better because it is only then that people will realise that the bottom is in. It is then and only then that confidence will be restored to the wonderful Emerald Isle.

This article was sent to me a few minutes ago and is an excellent follow up on my previous points in my earlier posting

Thanks to Chris at wealthbuilder.ie

Latest market up-date from Chris

EUROPEmod3

Image via Wikipedia

Latest market up-date from Chris

http://www.wealthbuilder.ie/

My thanks to Chris for his latest market up-date

This is a real treasure for those that are following the markets

Please click on link to view attached PDF documentWealthbuilder Quarterly Update 19.09.2010

Nowhere to Run, Nowhere to Hide!

This excellent article was sent to me this morning and it outlines the true situation facing Ireland and Europe. In the end there will be an “end game”. That “end” will involve a debt restructure for Europe similar to that adopted by Argentina in 1999. The result will be that most of the main European banks will go bust. It is inevitable, it is axiomatic, it is the law of economics. Unfortunately the longer the current denial is allowed continue the more difficult the final correction will be. Ideally the solution now, to save social chaos, is the breakup of the Euro, thus allowing the weaker nations start out on the road to national salvation immediately. Competitive devaluation is the only long term solution for Ireland, Spain, Portugal and Greece. Sometimes the “best” is the “least worst”.

Nowhere to Run, Nowhere to Hide!
• by Satyajit Das
• July 08, 2010
A year of wishful thinking…
The twelve months starting March 2009 was the year of wishful thinking.Central banks cut interest rates and governments opened their check books providing a flood of cheap money that gave the illusion of recovery and a normal functioning economy. Pouring a lot of water into a bucket with a large hole created the impression that the receptacle was almost full. As Norman Cousins, an American political journalist, noted: “Hope is independent of the apparatus of logic.”
Governments merely transferred the debt from private sector balance sheets onto public balance sheets. The Global Financial Crisis (“GFC”) has morphed into a Global Sovereign Crisis (“GSC”) as sovereign governments now face difficulty in raising money.
Stock markets and asset prices have tumbled. Money markets are exhibiting an anxiety not seen since late 2008/ early 2009. The year of wishful thinking has run its course.
Cradle of debt…
If subprime was the Patient Zero of the GFC, then Greece, the cradle of Western civilization, was the equivalent of the GSC. As historian Arnold Toynbee observed: “An autopsy of history would show that all great nations commit suicide.”
Greece’s significance is not its economic size (around 0.5% of global Gross Domestic Product (“GDP”)) but its significant debts. Profligate public spending, a large public sector, generous welfare systems particularly for public servants, low productivity, an inadequate tax base, rampant corruption and successive poor governments created the parlous state of public finances.
Several events focused attention on the problems. Greece needed to borrow around €50 billion to refinance maturing debt and fund its budget deficit. There were damaging disclosures that Greece, like many other European countries, had used derivatives to manipulate its debt figures. The revelations focused attention on underlying problems and set off alarm bells. Smelling blood in the water, markets pushed up the cost of Greek debt. Gradually, the ability of the country, as well as Greek banks and companies, to raise money ground to a halt.
Greece was the “canary in the coal mine,” highlighting similar problems in the PIGS (Portugal, Ireland, Greece and Spain) as well as some Eastern European countries. These countries alone have around €2 trillion of debt outstanding. Larger countries—the FIBS (France, Italy, Britain and the ‘States’)—also have similar problems of large public debt, unsustainable budget deficits and (in most cases) unfavorable current account deficits (both in absolute terms and relative to GDP).
Going nuclear…
Will Durant, an American historian, advised that: “One of the lessons of history is that nothing is often a good thing to do and always a clever thing to say.” Initially, European politicians and bureaucrats, who suffer from delusions of adequacy, did nothing, but wouldn’t shut up about it. The oft repeated battle cry was “no default, no bail-out, no exit,” Germany remained especially hostile to any financial “bailout.”
The major problem was “contagion”—the consequences if Greece was to unable to raise money from commercial sources. Much of Greece’s debt is owed to banks and investors in other European countries. If Greece defaulted, the resulting losses would have serious consequences for the affected banks and banking systems. Countries, such as Portugal, Spain and Ireland, with similar economic problems would inevitably be scrutinized and targeted.
By February 2010, the need for coordinated action by the euro-zone countries and the European Union (EU) was evident. While pledging eternal support, the EU waited for Greece to agree to an austerity program to remedy its finances. The cause of European unity was not served by attacks by George Papandreou, the Greek Prime Minister, that the EU was creating a “psychology of looming collapse” and making Greece “a laboratory animal in the battle between Europe and the markets.”

In April 2010, as the market for Greek debt worsened (the additional interest rate that Greece had to pay reached 8.00% over that paid by Germany), after considerable prevarication, the EU proposed a highly conditional €30 billion rescue package. The haiku-writing president of the European Council, Belgian Herman Van Rompuy, hoped “it will reassure all the holders of Greek bonds that the euro-zone will never let Greece fail … If there were any danger, the other members of the euro-zone would intervene.”
Markets considered the proposal inadequate and unlikely to avoid a Greek default. Increasingly desperate as circumstances began to rapidly spiral out of control, the EU increased the package in early May 2010 to €110 billion, including a €30 billion contribution from the International Monetary Fund (IMF) who would supervise the package and the implementation of the economic “cure.”
About a week later, continued market skepticism and increasing pressure on Portugal, Spain and Ireland forced the EU to “go nuclear.” After months of slow and tortured discussions, the EU acted with surprising speed announcing a “stabilization fund” to the value of €750 billion to support euro-zone countries, including an IMF contribution of (up to) €250 billion. The actions were designed to salvage the EU, the euro and over-indebted euro-zone participants by stopping contagion and further spread of the crisis.

Nicolas Sarkozy, the French president, turned the euro-zone’s sovereign-debt crisis into a personal triumph. The proposal, he let it be known, was 95% French. Le Figaro led the cheerleaders reporting Sarkozy’s comment that “in Greece they call me ‘the savior’.”
Struggling for a telling phrase, journalists spoke of financial “shock and awe.” A single word—panic—better summed up the actions. Initially, stock markets rose sharply, especially shares of banks that would benefit from the rescue. The interest rates on Greek, Irish, Italian, Portuguese and Spanish bonds fell sharply. As the announcement over the weekend caught traders unawares, the rally was driven largely by covering of short positions.
“Shock and awe” quickly proved more shocking and less awe inspiring than the EU had hoped. Wiser commentators mused that if €750 billion wasn’t going to do the trick, then what was?
Brussels, we are not receiving you…
Details of the “plan” remain sketchy. The entire package conveys the impression that the EU and European Central Bank (ECB) are hopeful that the announcement will suffice to bring stability to markets and the facilities won’t ever have to be used. A problem of too much debt was being solved with even more debt. Deeply troubled members of the euro-zone were trying to bail out each other. Given that all have significant levels of existing debt, the ability to borrow additional amounts and finance the bailout remains uncertain.
The reality is that Germany, with its large pool of domestic savings, must be the cornerstone of the rescue effort. Predictably, German credit risk margins have increased while the peripheral countries credit margins have fallen. The effect of the stabilization fund is that stronger countries’ balance sheets are being contaminated by the bailout. Like sharing dirty needles, this has drastically increased the risk of infection.
Trader Karl Dunninger, writing at http://www.seekingalpha.com, captured the madness: “The most amusing part of this is that nations seriously in debt and without a pot to piss in will be ‘contributing’ some of the money to fund the debt. Spain, for instance, has pledged to do so. Where is Spain going to get the money? Will they sell bonds at 8% to fund a loan at 5%? That’s a very nice idea…. let’s see, we lose 3% on those deals. That ought to help Spain’s fiscal situation, don’t you think?”
Solvency not liquidity, stupid…
At best, the plan provides temporary liquidity to cover immediate financing needs, repaying maturing debt and financing deficit. In a striking parallel to the early stages of the GFC, the reality that it is a “solvency” problem not a “liquidity” problem remains unacknowledged.
Most of the countries in the firing line have unsustainable levels of debt. For example, beyond 2010, Greece needs to refinance borrowings of around 7%-12% of its GDP (around €16 billion to €28 billion) each year till 2014. There are significant maturing borrowings in 2011 and 2012. In addition, Greece is currently running a budget deficit (currently over 12% but projected to decrease) that must be financed. As noted above, Greece’s total borrowing, currently around €270 billion (113% of GDP), is forecast to increase to around €340 billion (over 150% of GDP) by 2014.
The IMF’s publicly available economic analysis assumes Greece is able to refinance long-term debt by early 2012 and short term debt even earlier. Given that Greece is expected to have a total debt burden of around 150% of GDP and total interest payment of 7.5% of GDP, the ability to raise funds and the assumed 5% cost of refinancing may be optimistic.
The IMF plan calls for a program of fiscal austerity and major structural reform. This would entail a sharp reduction in the budget deficit to less than 3% of GDP and public debt under 60% of GDP. It is unlikely that Greece, despite heroic speeches from politicians, will be able to meet these targets.
Temporary emergency funding will not solve fundamental problems of excessive debt and a weak economy. Government expenditure will need to be slashed and taxes raised to reduce its debt. But the government is too large a part of the economy and the suggested austerity measures will most likely cause a severe recession. In turn, this will drain tax revenues and increase expenditures, making it difficult to reduce the budget deficit and funding needs.
The level of indebtedness may already be too high. Kenneth Rogoff and Carmen Reinhart in their survey of financial crises This Time It’s Different argue that sovereign debt above 60-90% of GDP restrains growth. Greece’s interest payments now total around 5% of GDP and are scheduled to rise to over 8%. Rising interest costs will only worsen this problem. The cure may not be feasible or will not help make it easier to meet future debt obligations. Ireland has already implemented austerity measures. The government debt as a percentage of GDP has increased to 64% from 44%. The budget deficit as a percentage of GDP has doubled to 14% from 7%. The nominal GDP of the country has fallen by 18%.
The plan may also make further liquidity problems inevitable. Instead of allowing Greece to raise funds normally, the bailout package is helping investors reduce exposure via repayment of maturing debt and the sale of illiquid longer-term securities. The package also risks forcing other vulnerable countries to rely on the stabilization fund. As Woody Allen once observed, “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.”
It always ends in the same way…
No one, including the IMF, seriously believes the austerity program announced by Greece will work. Argentina had debt-to-GDP of around 60% and a budget deficit of 6%. Adjustments necessary to halve both failed. After a long drawn-out struggle between 1999 and 2001, Argentina was forced to reschedule its debt and has still not quite made its way back to normality. Many of the vulnerable countries in Europe are in a much worse position than Argentina in 1999.
Rapid economic growth or high inflation would improve Greece’s prospects for survival. Neither is a realistic option. The euro-zone could continue to finance Greece, which would require extension of the current package, which is initially for 3 years. Greece may not be able to avoid a debt restructuring. For Ireland, Spain and Portugal, as well as others, the savage austerity measures required are unlikely to be palatable and probably won’t work in any case. All roads may lead eventually to debt restructuring.
The best course of action for Greece would be to “temporarily” (that is, for the next several hundred years) opt out of the euro and unilaterally re-denominate its debt into the “new” drachma. Through the currency devaluation, this would effectively reduce debt and restore competitiveness. In any debt rescheduling, lenders would take significant write downs, reducing Greece’s debt burden, giving it a chance to emerge as a sustainable economy.
The real agenda of the bailout is to prevent foreign lenders taking large losses. The investors were imprudent in their willingness to lend excessively to countries like Greece, assuming EU “implicit” support, and are now seeking others to bail out them out of their folly. As Herbert Spencer, the English philosopher, observed: “the ultimate result of shielding men from the effects of folly is to fill the world with fools.” As of June 2009, Greece owed US$276 billion to international banks, of which around US$254 billion was owed to European banks with French, Swiss and German banks having significant exposures. Bank for International Settlement data indicates that German and French banks’ exposure to Greece is about $50 billion and $75 billion respectively. In aggregate, the exposure of Germany and France to troubled European countries is around $1 trillion. According to the Bank for International Settlements, as of the end of 2009, French banks and German banks had lent $493 billion and $465 billion respectively to Spain, Greece, Portugal and Ireland.
The bailout’s purpose is to prepare for a possible series of sovereign debt restructurings in Europe. In an ideal world, banks and investors raise capital and write down their exposure to the troubled debtors over time, avoiding disruption to financial markets.
Dysfunctional functionalism…
Contagion is already a reality. Highly indebted sovereign borrowers with immediate financing needs are facing higher costs and lower availability of funds. Scrutiny of their public finances is forcing them to adopt austerity programs to remain credible borrowers with access to markets. The risk of losses from a Greek or other sovereign defaults has affected financial institutions. Mirroring events at the start of the GFC, the close linkages between euro-zone banks through cross-border loans and investment to each other remain a serious potential problem. The stress is most evident in inter-bank funding rates, which have risen sharply to their highest levels in a year.
Since 2008, money markets have operated on the basis that large banks are “too big to fail,” due to support from the relevant sovereign. The problems of sovereigns themselves have heightened concern about the credit risk of banks. Banks fearful of the quality of borrowing banks may limit lending.
Banks, especially those in Europe, are paying higher interest costs and may face difficulties in raising funds. The ECB recently warned of the problems faced by European banks in financing their operations and refinancing maturing debt. Markets are stockpiling liquidity, as evident by surplus balances at the ECB and other central banks, fearing a sequel to the deep freeze in financial markets in 2008. Activity in bond markets and new equity raisings has slowed sharply.
In the real economy, forced or voluntary retrenchment of government spending is restricting demand and restraining economic growth. Lack of demand in Europe affects the exporting economies of Japan, China and East and South Asia.
Dollar strength belies the economic fundamentals and will slow the ability of the U.S. to use exports as a growth engine. The weakness of the euro and resultant appreciation of the renminbi by over 14% also reduces Chinese exporters’ earnings and competitiveness. China is now even more reluctant to take steps to allow the renminbi to appreciate.
Sovereign debt problems are creating serious dislocations and perverse outcomes. Paralleling the events after the Asian monetary crisis in 1997/1998, the flight to dollars has pushed down interest rates on U.S. government debt. Paradoxically, lower interest rates reduce pressure for deficit reduction by lowering the cost of servicing public debt.
Fading hopes…
A combination of self-reinforcing events is driving a pernicious reversal of the dynamics of 2008-09. Then, co-ordinated government action on a grand scale stopped the global financial crisis from turning into a depression. Government and central bank strategy was a bet on growth and inflation as the most painless means of adjusting the overly leveraged and deeply indebted global economy. In the words of La Rochefoucauld: “Hope, deceitful as it is, serves at least to lead us to the end of our lives by an agreeable route.” Now, governments have become the problem, perhaps calling time on the wishful thinking of markets.
The most important consequence of Greece and European sovereign debt problems will be to force governments everywhere to stabilize and reverse the deterioration in public finances by a combination of new taxes and cutting expenditures. Many indebted economies, including Britain and Italy, have implemented austerity measures. The sharp reduction of government spending coincides with the end of the effects of stimulus packages and is likely to slow economic growth.
Country-specific factors–attempts by China to rein in excessive lending and rising property prices, higher interest rates in Australia and India driven by perceived inflation in local economies–may also undermine growth. Government demand for funds and deteriorating conditions in the financial system will reduce the availability of funds and increase cost, further restricting growth.
Refusing to acknowledge the real problems, major economies have transferred debt from companies to consumers and finally onto public balance sheets. A huge amount of assets and risk is held by central banks and governments, which are not designed for such long-term ownership. There are now no more balance sheets that can be leveraged to support the current levels of debt.

Borrowing can only be repaid by the sale of assets, including those funded by the debt, or by redirecting income, perhaps generated by the asset purchased, towards repayments. Unfortunately, the level of income and cash flow is insufficient to cover interest costs or amortize the amount borrowed. The GSC focused attention on the excessive level of debt and how it was used.
Based on per capita income of $30,000 (roughly 75% of Germany’s), Greece gives the appearance of a developed economy. In fact, Greece’s economy and its institutional infrastructure are weak. In the World Bank’s Index for Doing Business, which measures the commercial environment, Greece ranks 109th—behind Lebanon, Egypt and Ethiopia and, among developed countries, next to last. Around 30% of the Greek economy is unreported and informal. Tax revenue losses may be around $30 billion per annum. Productivity and quality are low. Despite the size of the public sector, public services are inadequate. Corruption is endemic.

While entry into the euro may have helped Greece ascend to major league status, it decreased international competitiveness as the country effectively priced itself out of the market for goods and services. Entry into the euro compounded existing weaknesses by providing access to low-cost funds. Greek bonds became eligible as collateral for ECB funding. Assumptions of “implicit” ECB and EU support (since proven correct) facilitated easy access to bank funding. A period of credit-driven expansion financed a construction boom and social policies, such as early retirement with large pension entitlement, often in excess of those available in more affluent countries.
The reality is that much of the debt in Greece was not used to finance productive enterprises but fuelled consumption or was channeled into unproductive uses. There are no substantial assets or income from those investments that will help repay the debts. Many countries and businesses face identical problems and now must adjust to that painful reality.
As Tyler Cowen, Professor of Economics at George Mason University, observed in his opinion piece “How Will Greece Get Off the Dole?” (New York Times, May 21, 2010), “…it’s a moot point whether Greece is a poor country masquerading as a wealthy country or vice versa. … If the old illusion was that Greece was a wealthy country, the new illusion is that Greece will, in short order, become wealthy enough to pay back ever-growing sums of debt.” The lack of viable policy options is increasingly evident in the panicked reactions of governments. In literature, they all quote Shakespeare in the end. When things go wrong in financial markets, it seems that everybody looking for a scapegoat blames speculators and short sellers.
Nowhere to run to, nowhere to hide…
The onset of the GSC marks a new dangerous phase of the credit crisis. At best a withdrawal of government support (through lower spending and higher taxes) will reduce global demand and usher in a potentially prolonged period of stagnation. At worst, increasing difficulty in sovereigns raising money and a clutch of sovereign debt rescheduling may result in a sharp deterioration in financial and economic conditions.
Financial institutions will continue to build up capital and reduce balances sheets, anticipating further losses and write-offs over time, including potential losses on exposures to sovereign loans. Lending growth will continue to be low, reducing growth. Consumption and investment will be below potential.
There is no political will to tackle deep-seated problems. The electorate is unwilling to accept the necessary adjustments and lower living standards. As the credit crisis enters its third year, the scale of sovereign debts means that governments now have limited room to counter any new economic downturn. The liquidity and government-spending-driven rally also caused “bubbles” in emerging markets. There is a risk that the GFC and GSC may morph into an EMC (Emerging Market Crisis).
Until early 2010 markets were, as the song goes, “Dancing in the Street.” Increasingly, another standard also made famous by Martha and the Vandellas is relevant: “Nowhere to run to, baby/Nowhere to hide.”

© 2010 Satyajit Das All Rights reserved.
Satyajit Das is the author of the Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010) due for release in the U.S.A. in late August 2010.

Latest Market brief from Chris

Thanks to our friends at http://www.wealthbuilder.ie     who have sent us their latest market brief and those of you that are following them must be doing great!

In our last communication in July to clients we pointed out that there was a possible significant bullish trend change approaching in the market. The key Dow Theory technical levels we identified were 4400 on the Transports and 10500 on the Industrials. As is by magic the market has remained “stuck” around these levels over the last 10 days. Full report in PDF HereMarket Brief 7th. August 2010[1]

Wealthbuilder.ie
Market Brief
7th. August 2010

The RIEGEL:

       by

Christopher M. Quigley

B.Sc., M.M.I.I. Grad., M.A.

 

 

 

MORALS MATTER. The financial crisis currently unfolding in America and Western

Europe will eventually morph into a social and political crisis unless the Federal

Reserve’s option of endlessly inflating the dollar is re-evaluated and stopped. The

powers that be must realise that their monetary policy is regressive and socially flawed.

The systematic destruction of the buying power of the green back through fiat fantasy

is preventing businessmen and entrepreneurs from obtaining real information

concerning the needs and wants of the real economy. A proper functioning money unit is

the antennae of true demand and supply and because of government interference false

impulses are being generated throughout the economy and as a result incorrect

economic decisions are being made; ergo the “sub-prime” and real-estate crises.

full article in PDF The_Riegel_A_New_World_Monetary_Unit

Quarterly Market Brief & Stock Pick from Wealthbuilder.ie

Wealthbuilder.ie

On the 21st. May we wrote the following:

“Due to lower highs and lower lows on both the Dow Industrials and Dow Transports there is

now a change of trend in existence in the markets. How long this correction will continue no

one can be sure. A bounce can be expected at any time due to the fact that the market is

terribly oversold based on Stochastics and the McClennan Summation Index. However, I do

not think we have seen support lows in place yet. What is the reason for this capitulation? As

mentioned in my last brief I believed the “flash crash” of the 6th. May mortally wounded all

indices from a technical pointy of view. It will take some time, probably the whole summer,

before some degree of confidence is restored.”

full report in PDF here Wealthbuilder_Quarterly_Brief

Wealthbuilder market brief 21.05.2010

 

Due to lower highs and lower lows on both the Dow Industrials and Dow Transports there is

now a change of trend in existence in the markets. How low this correction will continue no

one can be sure. A bounce can be expected at any time due to the fact that the market is

terribly oversold based on Stochastics and the McClennan Summation Index. But I do not

think we have seen support lows in place yet. What is the reason for this capitulation? As

mentioned in my last brief I believed the “flash crash” of the 6th. May mortally wounded all

indices from a technical pointy of view. It will take some time, probably the whole summer,

before some degree of confidence is restored.

Wealthbuilder_Market_Brief_21st._May_2010

Dow Jones Transport Index


History of the Dow Jones Transports Index


The Dow Jones Industrial Average is the best-known U.S. stock index, but not the oldest. The Dow Jones Transportation Average has that honor.

The first Dow Jones stock index, assembled in 1884 by Charles H. Dow, co-founder of Dow Jones & Company, was composed of nine railroads, including the New York Central and Union Pacific, and two non-rails, Pacific Mail Steamship and Western Union. That was the ancestor of today’s transportation average.

The iron horse powered the U.S. economy in the late 19th century. “The really strong companies at that time were primarily railroads,” says Richard Stillman, professor emeritus of the University of New Orleans.

It wasn’t until 1896 that the Dow Jones Industrial Average appeared. The same year, Mr. Dow published a list of 20 “active” stocks, 18 of which were rails-the direct predecessor of the transportation average. On Sept. 8, 1896, it stood at 48.55.

Over the years, railroads such as Union Pacific (the only remaining original stock) have been joined in the average by the likes of Delta Air Lines, Federal Express and Ryder System.

The story of the rails in this century is one of pride, fall and partial revival. In 1916, 254,000 miles of rail lines crisscrossed the country, nearly twice the current figure. But regulation of prices and “featherbedding” by unions stunted railroads, says Richard Sylla, an economic historian at New York University. The stagnant industry was pounded by competition from trucks, revitalized waterways and, finally, airplanes.

According to Professor Sylla, the Pennsylvania Railroad was the country’s biggest corporation in the 1870s. A century later, its descendant, Penn Central, filed for bankruptcy.

Since 1980, deregulation has brought a revival of sorts. Railroad employment has fallen nearly 60 percent, but ton-miles shipped and the industry’s net income have soared.

Dow Theory

An elaborate analytical system dubbed Dow Theory (so named by people who followed Mr. Dow, but not by Mr. Dow himself) holds that the Dow Jones Transportation Average must “confirm” the movement of the industrial average for a market trend to have staying power. If the industrials reach a new high, the transports would need to reach a new high to “confirm” the broad trend. The trend reverses when both averages experience sharp downturns at around the same time. If they diverge for example, if the industrial average keeps climbing while the transports decline watch out!

The underlying fundamentals of the theory hold that the industrials make and the transports take. If the transports aren’t taking what the industrials are making, it portends economic weakness and market problems, Dow Theorists maintain.

For more information  you might like to look in on  www.wealthbuilder.ie

Attached is the latest information on the US ecomomy

Rail+Time+Indicators+May+2010 PDF

Rail Time Indicators is a non-technical summary of many of the key economic indicators

potentially of interest to U.S. freight railroads. It is issued monthly free of charge by the

Policy and Economics Department of the Association of American Railroads

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