Welcome, 77 artists, 40 different points of Attica welcomes you by singing Erotokritos an epic romance written at 1713 by Vitsentzos Kornaros

Sunday, June 23, 2013

The Odds Of A Market Crash Are Much Higher Than Normal

Global financial markets are now in a very perilous state, and there is a much higher than normal chance of a crash. Bernanke's recent statement revealed just how large a role speculation had played in the prices of nearly everything, and now there is a mad dash for cash taking place all over the world.

After years of cramming liquidity into the markets, creating massive imbalances such as stock markets hitting new highs even as economic fundamentals deteriorated (Germany) or were lackluster (U.S.), junk bonds hitting all-time-record highs, and sovereign bond yields steadily falling even as the macro economics of various countries worsened markedly (Spain, Italy, Greece, and Portugal), all of this was steadily building up pressures that were going to be relieved someday. Just over a month ago, Japan lit the fuse by destabilizing its domestic market, which sent ripples throughout the world.

The Dash for Cash

The early stage of any liquidity crisis is a mad dash for cash, especially by all of the leveraged speculators. Anything that can be sold is sold. As I scan the various markets, all I can find is selling. Stocks, commodities, and equities are all being shed at a rapid pace, and that's the first clue that we are not experiencing sector rotation or other artful portfolio-dodging designed to move out of one asset class into another (say, from equities into bonds).

Here's the data. Let's begin with the place that the most trouble potentially lurks  bonds and here we have to start with the U.S. Treasury 10-year note, as that is the benchmark for so many other interest-rate-sensitive items, such as mortgage bonds.

Here there's been a very interesting story that predates the recent Fed announcement by nearly two months. This chart of the price of 10-year Treasurys tells us much (remember, price and yield are exact opposites for bonds; as one moves up, the other moves down):

The first take-away is that the current price of 10-year Treasurys is now lower that at any time since late 2011. The second take-away is that this has happened despite both Operation Twist and QE3.

That is, after all the hundreds and hundreds of billions of dollars of thin-air money-printing and bond-buying, Treasurys are now lower in price than when the Fed initiated Operation Twist and QE3.

And it's not just 10-year rates; the entire yield curve from 5-year to 30-year debt is now higher than it was a month ago:

This is very, very important. On the one hand, it tells us that the Fed may not be omnipotent after all, because you can bet your bottom dollar that the Fed simply does not want long rates to rise and that this was an unplanned and unwelcome move. On the other hand, rising rates will do much to a fragile economy and over-leveraged speculators and institutions.

I may need more hands here, because there are other undesirable effects of rising rates, including falling equities (we'll get to that in a minute), fiscal difficulties for heavy borrowers (many sovereign entities belong to this club), and mortgages becoming increasingly expensive.

An early casualty of rising U.S. interest rates, of course, was mortgage rates, which have climbed approximately 40 basis points (0.40%) over the past month:

Obviously, anything that will impact the housing market at this point is entirely unwelcome by the Fed, which has openly stated that it wants people buying homes and for a variety of reasons, people tend to take out fewer mortgages when rates rise. This is especially true for refinancing mortgages, an important source of revenue for financial institutions.

If it were just U.S. rates that were rising, that would be one thing, but rates have been on the move in Europe and Japan. In this next table, you can see two things: (1) much of the one-month rise in rates can be attributed to the past 24 hours (red arrows), and (2) quite a number of the most problematic nations have bond yields that are below their recent highs (as seen in the green circle).


What I gather from this is that countries like Spain, Portugal, Greece, and Italy do not deserve the ridiculously low rates they now enjoy, and that those old highs in yield will be revisited.

Where the U.S. had a change in yield trend in mid-May 2013, Spain was leading the charge by reversing course in early May:

Who was buying all that junky sovereign debt at inflated prices as Spanish yields fell? Institutions and speculators. The institutions were entities like Spanish banks and the Spain pension system, buying Spanish debt for reasons that seem far more political than financially prudent. For a while, that strategy worked, as rising bond prices delivered both nice yields and capital gains, but now pretty much anybody who bought those bonds in 2013 is (at best) roughly even for the year, leaving plenty who are nursing losses.

The speculators in this story represented the hottest of the hot money, involving hedge funds jumping on any trades that seemed to be headed in the right direction and/or offered useful yields for spread trades, both of which conditions were met by southern European sovereign debt. But that hot money is best described by the phrase easy come, easy go. It arrives fast and leaves even faster.

Okay, so what we can say at this point is that bonds are being sold off around the world. This is very bad for equities, because there's a connection between falling yields and rising equities. As yields fall, the risk-appetite of investors climbs because they need returns, and so they put more money into equities and real estate. This is especially true when interest rates are negative, meaning that they yield less than the rate of inflation, and that is precisely what the Fed engineered. On purpose.

However, this coin has two sides, and the less virtuous face combines rising bond yields with falling equities. It is simply the reverse of the Fed's desired and manufactured outcome of the prior several years.

If we look at the U.S. stock market, as typified by the S&P 500, we see that it peaked in May (to no one's surprise, I hope) and has been steadily falling over the same period that interest rates have been rising.

1600 is now the magic 'round number' for the market to break through if it is heading lower, which I think it is. We'll also note that the 50-day moving average (the rising blue line) has been critical support for the S&P 500 throughout the entire advance (green circles), and that it has been soundly violated on this drop.

Commodities have been heading down, too, but seemingly as a part of a larger move that's been underway for a couple of years:

Note that commodities are now beneath their 200-week moving average, which is a very bearish indicator (green circle).

Collectively, the move away from commodities, bonds, and equities in all markets globally tells us that there's nowhere to hide and that this is a 2008-style dash for cash. Everything is being sold, as it must, to meet margin calls, pay down leverage, and get out of positions; all are signs of the end of a speculative phase.

I know it's a lot to claim that we are at that turning point, but the evidence that we are there is now more than a month old, and it's time to consider that we are entering the next phase of our date with destiny.

What's Coming Next

In Part II: The Ride Down from Here, we look at the increasing number of flashing indicators warning that a 2008-style but worse sell-off is arriving. We say "worse" because this time it looks like it will be accompanied by a vicious cycle of rising interest rates. Plus, governments and central banks have used up all of their major options already. There are no more white knights to hope for.

We examine the likeliest course from here for asset prices and what to expect from the central planners as desperation increasingly drives the decision-making. We also look at what defensive steps individual investors should be considering. Because, as we've been advising for months, now is a time for safety.

Buckle up. It's going to be a bumpy summer.

Click here to read Part II of this report (free executive summary; enrollment required for full access).

Join the conversation about this story »



Greek kids put in orphanages for economic problems: Report

Press TV

Greek kids put in orphanages for economic problems: Report
Press TV
According to the report published by MailOnline on Sunday, most middle-class Greek parents who can no longer afford to feed their children have handed over their loved ones to orphanages. The report also noted that 10% percent of the Greek kids are at ...

and more »


Greece on Tenterhooks

Wall Street Journal

Greece on Tenterhooks
Wall Street Journal
Greece's coalition government has survived the abrupt exit of one of its junior partners—at least for now. The Democratic Left party withdrew its two cabinet ministers and two deputy ministers Friday to protest Prime Minister Antonis Samaras's ...

and more »


Greek Fest wraps up Sunday

The 33rd annual Greek Fest wraps up Sunday evening at Headwater's Park. Admission is free all day Sunday.


Political Lessons From Greece: Fake Social Movements and the Role of ?Alter ...

Political Lessons From Greece: Fake Social Movements and the Role of “Alter ...
Center for Research on Globalization
Between June 7th and June 9th we had 3 contrasting experiences in Athens. One was attending the European Alter Summit over 2 days; another was marching with Gay Pride on the evening of June 8th and the third was meeting with a group of Somalian ...


Shipping Giant Economou Likes 1920s Rotting Art

(George Economou Collection) Conrad Felixmuller's The Beggar of Prachatitz, from 1924, is one of the bleak pieces from that decade and the kind of art that George Economou prefers to collect. Greek shipping magnate George Economou considers himself "a very happy person - alive and vivid." Yet one of his main artistic focuses is the grim European period between the two world wars. ...


Samaras Says Crises Won?t Derail Bailout

Greek Prime Minister Antonis Samaras (L) with his new left-hand man, PASOK chief Evangelos Venizelos Undeterred by the loss of one of his coalition partners, the tiny Democratic Left (DIMAR) which refused to back his closing of the national broadcaster ERT and the firing of all 2,656 workers, Greek Prime Minister Antonis Samaras said he will forge ahead in a new alliance with his remaining ...


Papaconstantinou Could Get Life

A parliamentary committee investigating former finance minister George Papaconstantionou’s handling of a list of 2,062 Greeks with $1.95 billion in secret accounts in the Geneva, Switzerland branch of HSBC bank will refer his case to the Special Court and recommend he be charged with three felonies, which carry up to life in prison if he is convicted. The majority of the committee has ...


Tourists Prefer Traditional Greek Products

Tourists and visitors are always potential consumers during their holidays, regardless of the time they stay at tourist destinations on Greek islands. They preferably choose Greek traditional products, while there isn't any dominant trend concerning the way they combine their purchases. A significant percentage makes purchases in combination with some other activity in nature, such as sea ...


California Girls Greek Donkey Ride Unforgettable

This is one way to get up to the top of Santorini, although it can be a little scary in spots depending on the donkey you're on. One thing's for sure - you won't forget it. I woke up on the morning of July 3, 2010, in Santorini, a small island in Greece. My family and I were on a two-week cruise through the Mediterranean. Every day I would try something new, but little did I know ...


State TV woes part of broader Greek media chaos

An opposition supporter wears a "Free Press ERT" T-shirt during a rally in Athens, on June 17, 2013. As debate swirls in Greece over the future of public broadcasting, analysts say the abrupt shutdown of state broadcaster ERT is only the latest problem to hit Greece's chaotic media ...


Greek PM pledges cooperation

Greece’s conservative Prime Minister Antonis Samaras pledged on Sunday to work more closely with his socialist allies to prevent disputes that nearly brought down his government last week.


Bullied NY bus monitor teaches kindness year later

Bullied NY bus monitor teaches kindness year later
GREECE, N.Y. -- It's been a year since Karen Klein became known as the bullied bus monitor at the center of a 10-minute cellphone video that unleashed a flood of donations. At her upstate New York home in suburban Rochester, she reflected on the year ...

and more »


Albanian opposition activist killed in election day shootout

PM and opposition leader condemn violence in Lac as Albanians vote in closely contested election

An activist was killed and a politician wounded in a shootout during a closely contested election in Albania on Sunday that is being watched by western allies worried about democracy in the country.

The opposition left scents victory in the vote, which would deny the prime minister, Sali Berisha, a third successive four-year term. But the threat of a disputed result is growing after a political row left the central election commission short-staffed and unable to certify the result.

Television pictures showed bullet casings scattered across a street and the smashed rear window of a car after the shootout in Lac. An opposition activist was killed and an election candidate of Berisha's ruling Democrats was wounded. Police said four guns were fired. Berisha condemned the violence.

Opinion polls are unreliable but point to a narrow victory for the Socialists led by Edi Rama, a former mayor of Tirana. He has been buoyed by an alliance with a small leftist party previously in coalition with Berisha.

After losing the last election in 2009, Rama called protesters into the streets and four were shot dead by security forces. Since the fall of communist rule in 1991 Albania has never held an election deemed fully free and fair, and failure again would further set back its ambitions to join the European Union.

Rama said the Lac shootout was an "effort to frighten people, to scare citizens away from the ballot boxes". "I appeal for people to vote, because a decision that takes just a few minutes will decide not just the next four years but the fate of a generation," he said after voting.

Including Albanian migrant workers abroad, there are 3.27 million eligible voters. Official results are due in the evening, but a system by which party members count the ballots has repeatedly led to disputes and delays.

Rama pulled his three representatives from the seven-member election commission in April after the coalition government sacked a member whose party had switched sides to support the Socialists.

The Socialists and the Democrats differ little on Albania's goal of joining the EU or its pro-western policy. But their confrontational relationship does not sit easy with Brussels or Albania's Nato allies.

The EU says the election is a crucial test. Albania applied to join four years ago but has not yet been made a candidate for membership.

The next government will take on an economy feeling the effects of the crisis in the eurozone, notably in Greece and Italy where about one million Albanians work and send money home. Albania has avoided recession but remittances are down and public debt and the budget deficit are rising. © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds


Coalition Breakup Revives Greek Bailout Fears

(AP Photo/Petros Giannakouris) A protester stands in front of the Greek state television ERT headquarters in Athens. Workers there continued to air pirate broadcasters as the government ignored a court order to restore its signal until the agency can be restructured this summer. The banner on the top reads in Greek ERT Is, and Will Remain Open. The Greek government of Antonis Samaras saw its ...


Greek Cypriot leader seeks more EU aid

The cost of bailing out Greek Cypriot Administration has exceeded estimations. Greek Cypriot leader Nicos Anastasiades asked for more money from Brussels ahead of a key meeting by Eurozone finance ministers.European Union finance ministers adopted a 10 billion Euro bailout package for the Greek Cypriot Administration. According to the EU sources, the Greek Cypriot leader asked the Bloc to provide ...


Samaras Says ND-PASOK Rule

Despite the departure of one of his coalition partners, the tiny Democratic Left (DIMAR) Greek Prime Minister Antonis Samaras said his New Democracy party will move ahead with reforms with a united front with his other partner, the PASOK Socialists. With PASOK leader Evangelos Venizelos likely to become Deputy Prime Minister and his party rewarded with a number of Cabinet positions in a shakeup, ...


Wall Street's Brightest Minds Reveal THE MOST IMPORTANT CHARTS IN THE WORLD


Here they are: the most important charts in the world.

We asked our favorite analysts, traders, economists, and strategists across the Street for the charts that they deem the most important right now, and this is what they sent us.

A lot of the focus is on fixed income – specifically, what is going on in the U.S. Treasury market. The sell-off there over the past several weeks and the attendant rise in bond yields has had violent implications in financial markets around the world.

But there are a lot of other things going on as well.

Frederik Ducrozet, Crédit Agricole: Unemployment rates in the U.S. and the eurozone are diverging

Sebastien Galy, Société Générale: The U.S. has rarely endured negative real interest rates for this long

Bartosz Pawlowski, BNP Paribas: Real money investors haven't started dumping emerging markets yet

See the rest of the story at Business Insider