Capitalsynthesis

Weekly Technical Comments – Xmas Rally in Place (Subject to 1158 sp500 holding)..

Here attached the UBS pair’s weekly technical comments..

They are maintaining their bullish stance re equities and pro risk assets generally. They don’t mention the eurusd specifically but state they are bearish on the dx and so we have to assume they are bullish on the euro as the dx is mainly the eurusd pair. They use the AUDUSD as the proxy for anti or pro risk although it makes up for a very small percentage of the dx (dollar index). In spite of the recent sell off the audusd did not make a lower low. She has some relative strength therefore. They use this as supportive evidence for a continuation of the pro risk rally. They could have added the fact that the CRB did also not make a lower low and her bull trend of 3 years is still intact for the moment.

I take a very similar though slightly different view on the technicals. As i commented last week, we were over sold and a pro risk bounce was the higher probability trade, even for the euro. Although the dx is over bought, there is no indication of her strength is over following this near term profit taking. The euro chart is a weak technical chart now and the macro issues remain disasterous. The euro issues need to be resolved as Italy’s debt sale today showed yet again. Can the euro decouple from the dx, no. The maths of the dx makes this extremely unlikely. Can the dx remain strong and even add weight and asset markets rise – yes, imo. Though clearly, commodities may underperform if the dx does well vs other equity sectors. UBS misses these critical discussions at their peril. The logic of historic correlations must always be questioned and reviewed. It seems to me we are in the process of changing correlation levels between instruments. This is natural and very important to recognise and adjust technical models accordingly. Thats my two pennies for what its worth. We must all make our own decisions.

Weekly29-11

Rich

Chart Blitz

So ends another week in the capital markets. Last week the technicals confirmed the macro fundamentals so that this weeks move was pretty inevitable. Everything fell into place in last week inc the inverse correlation of equity markets to the dx weakening. Although the macro picture seems to be worsening every day that passes (as commented on the forum area) when we look at the charts they aren’t as technically bearish short term as we may be feeling..

Firstly the all important DX

The DX (dollar index) has a technical resistance in line of sight. She is over bought using the cci. Technical levels can blow over without a fight but with so many short the euro and so many long the dollar and over bought indicators flashing red the probability is that the level will hold for now and some profits taken. Fundamentally this may be hard to accept but a few weeks of softer news events would assist no end to calm things down. As would central bank interventions at this level which nicely fits with the eurusd level at 1.32 as below.

We see from this that we are at a key level on the eurusd. The DX above is mainly constructed from this pair. The usd has been performing more positively vs the JPY and the GBP has room to fall a little more vs the USD so the DX level can mathematically be hit without the eurusd falling below her 1.32 support.. lets see. I will play a bounce if we get a spike through. If not no problem.

Next up the ES futures on the S&P500 index. Americans main market index of 500 largest corporations.

I fully expect the 1125 level to come into play and this area to be the key near term area for support or not. If this area blows over we are really in trouble and looking at the 1078 sort of level thereafter. From a purely technical standpoint the 1125 level could provide for a high high and the last stopping off point for the bull to stay alive. If she falls over the 1078 comes into play and even worse than this the technical damage to asset markets would be immense. Usually a long period of consolidation would follow such a move. Of course in a world where money itself can be altered in quantity and the push of a computer button such technical comments are almost completely worthless. Its worth hearing the technical comment but tossing it away if/when Ben and the team press those buttons. What we can say is without the banking system increasing money supply and without the central banks increasing money supply this chart is very ominous and only the near support at 1125 may provide the last real chance at keeping the bull alive. The ym (dow) looks very similar so ill leave her for now unless someone shouts they want a run through. Here next, the nas100 or nq futures.

Its not a disasterous chart by any means, yet! The problem here is the way we sliced through the support at 2190 or so. The move had been flagged clearly by the continual inability of price to breakout to new highs. The technicals suggested the nas100 would give up a decent move and so it proved to be, out performing the es and ym to the downside. The move has produced a deep cut through the support and now we have this level as a serious resistance before any move north can convincingly be rejoined. (In a money printing environment clearly such technical barriers may be easily overcome). Near term 2120 or so may come into play. Again much like the sp500 above a key area to keep the bull alive or not as the case may be. These charts have both run up very quickly on money printing. The move downward without more money printing may be equally as fast. (A quick reminder on the monetary environment we live in increase there are new readers here. Maintaining your balance sheet size as a central bank does not represent more money printing as what is important is the margin increase month on month in the money supply. Maintaining money supply at a constant level does not assist even in a low interest rate environment. Money supply must grow in a debt and interest based fiat monetary system). In short balance sheets must expand and expand very soon if this bull is to keep moving forward. There is, as yet, no significant indication that consumers will add to their debts unfortunately although students in Europe and the US are making an excellent effort to increase money supply all by themselves.

Next up the CRB. Commodities index. This is not a promising chart especially when you consider nymex crude WTI is just shy of $100 and Brent is over $100.

Much of the weakness here is coming from the industrial metals as well as the agricultural grains which are struggling to cling to their bull trends. Wheat looks bad. Corn a little better. Copper weak and weakening. etc. Oil is better as said but the CRB uptrend is in danger until some monetary juice hits the decks. 300 looks like a key support for the CRB. If/when oil weakens itshard to imagine the crb holding on to this trend. The result of losing her trend would be pretty disasterous for most of the commodity stocks especially the juniors.

Gold continues to be one of the best performing instruments in spite of the recent US$ strength. Russia bought another 20 tons or so through October we hear.

Gold in most currencies aside from the USD rose in the last few days which we cant see from this USD priced gold chart. Gold very conveniently has technical supports at 1650, 1600 and 1550. Any spike to 1550 would most likely be a buying zone. So for now we watch and wait would be my technical comment. Silver looks less promising and the silver miners even less promising but their charts another time.

I’m afraid i’m out of time for now on these technical matters. I wanted to cover more but we are off to Italy for a birthday party and a short break. Back to it from Tuesday. The UBS technical comments will be out on the 29th.

In summary, for now we have near term supports on all sorts of instruments in line of sight. It would be wrong to chase the recent bear moves therefore. Lets get the relief rally done and see where we are. The macro news flow will be facinating to watch. Its hard to see any ray of light at all from the euro zone. With such a bearish macro picture re the debt implosion in euro land (and the cds contagion issues that could result) its also wrong to go naked long asset markets in spite of the near term likely rally scenario. I don’t have time now but bring up the charts of any of the major euro banks and for that matter Goldman Sachs or BAC in the US. Their charts are a disaster and show not obvious signs of a bottom, at all. In such an environment its very hard to see how much of rally can be sustained even as earnings continue to come through ok for now due to the inflationary nominal up draft created by printing presses.

The very best to all.. I hope everyone is ok. These recent markets have been tricky and 2011 has all the appearances of being either a negative or break even year. Many super star hedge fund billionaire managers have lost a packet this year so keep this in mind before you beat yourself up too badly. I have an ‘uber’ strong suspicion that 2012 will be a stella year for asset markets and likely a disasterous year for holders of cash and government bonds. Our challenge will be avoiding the financially repressive legal framework that will inevitably go with the mountains of freshly printing confetti.

Again, the best to all.. Rich

Summary Its a Bacon Slicer – ‘We Are All Doomed But Some Less Than Others’

Where to start..

Firstly, apologies for not posting sooner. I will post some technical charts up after this brief comment.

France, Germany and Italy made a joint statement out of Frankfurt today that the ECB will remain independent and that there would be no undue pressure from sovereign states to enforce the ECB to monetize debt in the same way as the US and Uk have already done. Merkel today made an additional statement that there would be no joint euro bonds. Just as the statements were given Portugal’s debt was downgraded to junk status by Fitch and Italy’s 10 year debt’s rates have risen back over 7%.

We can only put political comments into perspective by looking back at the history of how political leaders have kept their promises previously. Fiat currencies are based only on faith. Throughout history the last people to throw in the towel re confidence in that fiat currency are its leaders. (Whether they privately do something else is another matter of course). So just as Mexico’s 1976 leader poured cold water on ever devaluing the peso, some 10 days later he devalued the peso. Just as Norman Lamont insisted the pound’s peg to the emu would be held no matter, what some 24 hours later the peg was relinquished. If you base your investment decisions on what central bankers and political leaders say you will end up with nothing is the clear lesson from the history books.

It is clear that European leaders have consistently ‘not got’ what is occurring. They have remained behind the curve during the entire crisis. They have employed stop gap measures drip feeding money into the monetary wound that is their sovereign debt dilemma. Yesterday ratings agencies warned again on France’s triple A. They said (im paraphrasing) one more straw will break France’s back and she will have to lose her triple A credit score. Moments after this warning Dexia came out and declared they needed much more capital. Where will this capital from? France and Belgium are seeking yet another off balance sheet solution to the capital problems by, once again, guaranteeing the bank’s obligations. The UK famously did this with its banks. But the UK can do this as she has a printing press which France does not. The difference is clear and the market is starting to question just how sound all these off balance sheet promises are.

http://www.bloomberg.com/news/2011-11-24/dexia-guarantees-being-prepared-by-france-belgium-french-official-says.html

The US is barely any better with its ‘super committee’ proving less somewhat less than ‘super’. The UK is badly struggling in spite of the endless qe she is pumping into her debt markets. The UK and US are ahead of the curve in respect of understanding how to run a ponzi debt based system. They understand how the system functions. That immigrants and students etc are the best candidates to take on more debt. And that newco banks free of the bad debts of the bad banks are the best vehicles to increase debt/money supply. Some sectors of the Uk economy will do very well as the money flows in spite of debasement issues the UK will face. The Europeans to compare are novices at running this sort of system. Average personal debt in euroland remain low. Savings remain high. Europe is starting to grapple with this problem of bending its consumers to borrow and spend by gradually introducing student loans etc. Spain is finally threatening to remove free university tuition as a right and make students take loans. In spite of the euro chaos Europe has further to travel down Hayek’s road than does either the UK or US.

For now we have the euro crisis which will continue to take center stage until the ECB or IMF print to resolve the deep structural problems within the eurozone. I’ve been deeply researching the possible scenarios that could resolve this euro crisis. Rather than run through all the options, I recite to you the preferred option here.

The Germans/ECB/Bundesbank must accept debt monetization as the only ‘reasonable’ solution to these deep systemic problems. But their must be a pound of flesh paid for the Germans to accept this monetization strategy. I suggest only the closest ally states to Germany will see monetization support from the ECB. The dead wood must be cut away so the debt monetization is kept as small as possible and for as short a period as possible. I would suggest Ireland, Portugal & Greece will be almost certainly cut from the euro. Spain is a 50/50. Spain has very low government debt. Her people have very low consumer debt. Her people save nearly 12% of their salaries every year. Spain’s problems are structural in that they spend far too much and their economy is based only on tourism and agriculture. Spain could kick off a consumer boom given the debt levels are low but her banks are zombie banks for now and would need masses of capital to enable them to lend again. Spain is a big problem and frankly, if i were involved, i would let Spain sink with the others. A pact of Germany, France, Italy, Austria, Holland, Belgium etc would suffice as a euro core. An ECB treaty change to enable debt monetization and bank bailouts (tarp) would be conditional upon these states being removed from the euro. The remaining states would have to sign up to new fiscal constraints. Europe would divide and many French and Germany banks would need to be bailed out to take the hit that Portugal, Greece, Ireland, Spain leaving the system would entail. These states would have to immediately see their euro denominated debts take a hair cut. This would be great for these states and very bad for the banks. The UK would take a large hit from Irish debts. This is fine they have their own printing press.

How this affects us is a very good question. I would not want to be holding a lot of euros in a Spanish account at present. But we have some time, as the crisis will worsen before we get to the end game of monetization by the ECB due to the false ‘confidence’ of the political elite that we see above. Each county’s citizen’s accounts would have to be treated differently. To stop a bank run from Spanish and Greek accounts it is possible that your residency or citizenship determines what euros you are entitled to. This would stop Spanish citizens from transferring their assets to German banks and therefore avoiding the debasement. These sorts of issues would need to be worked through and may directly affect us.

The ‘final solution’ measures will inevitably come with Tobin taxes, capital controls, price controls and various other cross boarder travel issues. Its wont be a pretty solution but it will work in supporting the core and allow the insolvent states to address their structural problems ie a massive devaluation alongside cutting their euro debt mountain. (As their own currencies debase and debase these debts may, in fact, never be repaid as although their nominal euro value is cut their local currency value surges. Continued core banking tarps may be needed as these non core euro states debase again and again.

Asset markets wise. Don’t misunderstand me i’ve not transformed in to a super bear over night. I believe more than ever that equity markets rather than currencies and or debt is the place to remain. If you have a share of say VW, as just one example, you are hedged in many senses. You own a stake in a company with world leading assets. This is far better than any currency or government debt paper. Gold and silver, in spite of their volatility are safer than currencies. But what is very clear is that the ability to hedge is a vital skill and that all of us would do well to brush up on these skills as the storm approaches.

Upon that note, technical charts next..
All the best Rich

Market Chart Blitz

Given where we are, lets rush through some charts..

Here the super important Eurusd.. this pair is the major construct for the DX (dollar basket) and seems to define the entire direction of the market (most of the time). The risk on off correlation to eurusd is weakening a little but is still alive for the moment. Unfortunately this pair is also one of the most managed currency pairs in the market. All the central banks and central agencies like the IMF and WB are involved. To the chart. We see a chart looking for direction. The story has been building for the last three years in fact. The chart looks weak. The probability is to the down side. The technical therefore fits with the macro picture. ie the euro zone is in deep trouble without debt monetization by the ECB. The question is whats priced in and what is not? I have to say, as has been the story of the last 18 months, the euro is relatively strong vs the usd given the issues she faces. On good news (ie printing news) the euro may rise in spite of the obvious dilution story. Yet another paradox we might well say but we have to accept what price is showing us. For the moment the risks are to the downside and for as long as Europe extends and pretends there is a non printing route the euro has the potential to fall off a cliff.

Next here the sp500. The picture isn’t all bad here. Its much more positive than the eurusd chart in fact. The Aug to Oct retrace-ment bottomed at a key level. The current push back northward is in danger here and now but hasn’t broken quite yet in that this could be a very normal stop hunting manoeuvre to push price beyond the support trend momentarily. The uptrend remains intact imo therefore.. but she is clinging on for dear life now. The real issue continues to the macro news re the euro area. Debt deleveraging grips the eurozone until the ECB prints. Can US equities cling on to the uptrend against this backdrop.. the chart suggests yes at present. Though the next few days/week are all important. She needs to climb again and ideally get above some key levels beyond 1250 imo.

Here the all important CRB. She is maintaining her uptrend but she is bouncing around the bottom of the uptrend which she needs to hold and push on. Remember we have oil strength here which is supporting the CRB as she is a major component. Therefore many commodities have actually broken their up trends. Oil is supporting the crb excessively at present. If oil collapses the CRB support line is in great danger with the obvious implications for the AUZ$.

Next up the Copx or copper miners index etf.. Not a good chart.. at all.. I remain lite copper miners for this very reason.

A big bounce from the early Oct low support but no higher high as yet and price starting to wander into dangerous territory again.

Next up one dear to the hearts of many in the markets. The Gold/HUI chart.. Both these charts are strong charts. The HUI is weaker than the Gold chart but even the HUI sell move in late sept early oct did not produce a lower low. The range held and so the chart remains positive with the probability to the north. This is supported by the gold chart. Having said this, neither seem to offer much in the way of a high momentum move to the north side right now. They are both starting to suggest a sideways period of range bound trading from a purely technical comment unless they regain momentum in the next few weeks. Macro wise there is much on the radar to suggest such a momentum stimulus may well emerge so lets wait and see.

Next up more troubling is the silver miners chart.. SIL.. This is not a good chart. We got that lower low. Was it a fake move or a real indication of forward direction? Silver has been acting like a commodity rather than a monetary metal and so the technical probability remains to the downside for now with the annoying possibility of some really nasty downward momentum move against the silver miners. This goes against all the fundamental evidence. This instrument/asset class is perhaps one of the most difficult to read here i.e. where the technical picture so contradicts the fundamental picture. I have a big cash and leverage option position on the silver miners through individual listings. I have to decide how to play this..? Im thinking option puts to catch some of any massive potential move to the downside. I prefer puts to futures as the upside is enormous on the silver miners. I would certainly not want to be on the end of a fully exposed short on the silver miners so an option put is the better vehicle. The issue here is historic volatility making them expensive.. Ill run some nos and examine what is available. (So much of wealth and fund management is the proper selection of instruments rather than purely directional entries and exists it seems).

Lastly for now i wanted to comment on the refiners.. I’ve been watching the crack ratio. The ratio having been so uber positive has been smashed.

The margins for oil refiners has been destroyed just as nymex has risen again over 100usds. This is interesting from a macro sense as it means prices at the pump in the US have barely risen just as the raw commodity has risen in price by over 30% in a short period of time. From a purely tactical sense i sold all my refiners a few weeks ago as i posted. It looks to have been absolutely the right call as the sector has been smashed subsequently. Here one of the stocks i sold from the sector WNR, as an example.

But before we get too despressed think of the poor souls in the following sector.. Euro Stoxx Banking index here below.. A horrid horrid chart with no obvious bottom in sight.. Stay away..

All the best guys..

Rich

Euro Farse – Update..

As previously noted here, the ‘final solution’ re Europe’s debt deleveraging must come from either the ECB and or IMF.

It should come as no surprise then that Euro officials are working along side the IMF to work around the ECB non monetization of debt legal constraints. Last night the IMF Head of European matters resigned. We can guess it has something to do with what is being worked on behind the scenes. This just released from Reuters in the last few minutes:

ECB could lend to IMF for Euro Zone Rescue – Officials

By Jan Strupczewski and Daniel Flynn  

BRUSSELS/PARIS, Nov 17 (Reuters) - Euro zone and
International Monetary Fund officials have discussed the idea of
the European Central Bank lending to the IMF, to provide the
fund with sufficient resources for bailing out even the biggest
euro zone sovereigns, officials said.  

"Some discussions on this have taken place... It could be
one way of getting around the legal restrictions on the ECB,"
one official with knowledge of the talks said. A second official
said ECB lending to the IMF was being explored.  

The idea appears as the rising severity of the euro zone
debt crisis, which now threatens to engulf Italy, or even
France, makes policymakers desperate to get the ECB, with its
limitless resources as a central bank, more involved in the
rescue efforts to buy governments time for reforms.  

Economists say only the ECB now can offer a credible
guarantee to markets, as plans to leverage the firepower of the
euro zone bailout fund EFSF to 1 trillion euros were unlikely to
fully materialise or, even if they do, to be sufficient.
But EU law forbids the ECB to finance government borrowing.
The bank has repeatedly said it would not become the lender of
last resort to euro zone governments, which should first of all
change policies that created large public debt and slow growth.  

France has openly called for the ECB to get more involved by
issuing the euro zone bailout fund -- the European Financial
Stability Facility (EFSF) -- a banking licence that would allow
it to refinance itself with the ECB liquidity operations.
Yet Germany fiercely opposes such an idea, fearing it would
lead to financing government deficits, endanger the ECB's
independence and in the end lead to higher inflation, which
would make all euro zone citizens poorer.  

ECB INDEPENDENT, BUT HELPING Policymakers have discussed, therefore, how to get the ECB
involved in crisis-fighting without endangering its
independence. Lending money to the IMF, rather than any euro
zone government, could achieve that, officials said.  

"It is just an idea, at least for now," a euro zone official
said.  

Article 23 of the ECB statute says that "the ECB may conduct
all types of banking transactions in relations with third
countries and international organisations, including borrowing
and lending operations".  

The IMF could then use the ECB money to finance various
rescue operations in the euro zone like bailouts, precautionary
credit lines, on its own, or in cooperation with the EFSF.  

    "It is doable," a second euro zone official said. Two
further euro zone officials said they had heard of the idea.  

Money from the ECB to the IMF would also help alleviate
criticism from non-euro zone IMF member countries that all of
the fund's resources -- which come from all IMF members -- are
being used up for the relatively rich euro zone.  

To prevent a collapse of the euro zone debt market, the ECB
has been buying government bonds on the secondary market, saying
it was doing so to improve the transmission of its monetary
policy, which highly volatile bond markets were distorting.
It has stressed however, that such purchases were limited in
scope and were also temporary -- a half-hearted approach in the
eyes of the market.
While it may be designed to keep the pressure on governments
to implement reforms, euro zone policymakers privately say it is
also the costliest possible way of dealing with the crisis.  

"If the ECB told the market it would buy euro zone bonds for
as long as it takes, or up to some big limit, who in the market
would want to test that? But if they do it bit by bit, markets
keep coming back," a third euro zone official said.

Monetary History – The Day After the 1976 Peso Devaluation…

A personal story extracted from swissmetalassets.com link provided below.

In 1976 Mexico devalued her peso vs the US$ by 50%

“Everyone in the country was in shock. People’s net worth had devalued more than 53% overnight. The value in savings accounts dropped in half and neither merchants nor consumers knew how to react because they had never been through something like it before. Luckily for me, I had also exchanged my money and my salary had been set in US Dollars when I signed my contract with the company to work in Mexico. For me, it was like getting a 100% raise, since for a long while; my house rent remained the same as well as utilities, clothing etc. I remember that on my boss’s next trip, he bought himself a couple of nice suits at a nice discount.

Businesses were unable to immediately raise their prices. (Note – ‘financial repression’ – price controls in force, also capital controls ie a 33% tax if you sent money out of the country to an overrseas bank). They had to do it slowly, and through many sacrifices. The positive side was that the company had a loan in Mexican pesos for an expensive property and was able pay it off with the new dollars at, practically a 50% discount. (Note – we, as speculators, must always borrow the weakest currency). Before the devaluation, we had been leasing other properties, some of which had expired and had been on a month to month basis. Thankfully, immediately before the devaluation, I renegotiated and signed some of the leases with modest increases for a term of 5 years. (Note some property cos in the UK have ten year leases with 3% cieling price increases.. this is a disaster. Note also that many defined benefit pensions have cieling price increases applied.. be very careful of your DB pension fine print!). After the devaluation occurred, the landlords wanted to renegotiate these leases, but because of the terms, we enjoyed low rents for that period. Later, as we leased new properties, the owners introduced clauses tying the annual increases to the value of the US dollar, which appreciated every year until the recent fall of the dollar in the exchange rate.

Our attorney in his 50s, of German descent, who spoke English and Spanish with a German accent didn’t take my advice on the oncoming devaluation. After the devaluation, he was so desperate that he came into my office one day, accompanied by another attorney that worked for him, carrying an old-fashioned suitcase, which he placed on my conference table. He opened the suitcase, which was completely filled with high denomination peso bills. I had never seen that much cash in my life and I was completely surprised. He pleaded with me to accept the money right then and allow him to purchase shares in our company. I told him that this was not the proper procedure, but he asked me to consult with corporate headquarters and insisted I put the money in our safe. As I expected, corporate said no and much to his distress, I returned the money to him.

People were so desperate to exchange their pesos into dollars that the supply of dollars dried up and some, who had them, sold them at a premium in the black market. The situation was so dire that a presidential order was passed banning the banks from allowing customers to open US dollar bank accounts. (note this point! Open overseas bank accounts now!) A few years later, when the peso stabilized, this practice was reversed. (note Mexico finally emerged from her currency debasement/inflationary policies some 15 years or so later”.

Its a very sad and desperate story created by an overhang of debt and political promises that could never be met. Savers in Mexico were destroyed. Those with equities survived. Those with a spread of world assets and local debt prospered. The rich became super rich in Mexico during this period as they always do in money printing environments. Perhaps it should be no surprise that luxury brands sales and profits are surging or that the art world is booming. Equally it should be no surprise that the richest man in the world is Mexican. Its both a paradox and opportunity that the developed world private capital holders are mainly in cash and government bonds.

For Mexico the 1976 devaluation was simply the start of the long process of the complete destruction of middle class savings.

“In August 1982, the Mexican government announced that it could not meet its scheduled debt payments. When a severe recession shook the Mexican economy in 1982, the government nationalized the country’s banks and imposed severe tariffs on imported goods to protect domestic producers. This was the beginning of a period of economic contraction; real per capita GDP growth from 1981 to 1988 was -2% per year. The government was forced to cut spending on many social and economic programs including education and health care”.

The process took a total of 2 decades to really complete. Only then was the ratio of cash so low that any QE type initiative was rendered useless. Here is a graph of the US$ to the Peso over the 1978 to 1984 period. The devaluations started before this chart and ended after well after this chart.

Stock Market wise:

In 1979 the Mexican stock market index mid price was 1,250

In 1988 the Mexican stock market index mid price was 160,000

As capital holders we would do well to remember every line of the Harare Stock Exchange’s CEO, Emmanuel Munyukwi, wise words.

“Negative interest rates and inflation had caused a stampede for assets, which had driven share prices to record highs, even in real terms. It’s quite embarrassing because the exchange is supposed to mirror the reality of the economy. We have benefited from the distortion of the market.”

Rich

p.s. Here below another currency being very purposefully, yoy, debased. We also see today Brent and Nymex crude oil surging upward in value as currencies are debased as unemployment rises as gdp flat lines, real incomes decline as corporate profits grow. Burberry announces record profits..

This process has plenty of historical precidents. A very basic understanding of history will point you to what is unfolding and about to unfold.

http://www.swissmetalassets.com/living-currency-devaluation.html

Why A Tax Haven Now?

From the 1970s until 2008, consumer debt has increased, almost unabated, year on year across the developed world. The UK, as just one developed world example, has seen consumer debt increase from 43% of GDP in 1973 to over a 100% of GDP in 2012. In the UK’s case, much of this consumer debt was spent on purchasing imported consumer goods and much was spent inflating a large middle class house price bubble across the UK, which sustains to this day. This phenomena was not unique to the UK however as huge increases in consumer debt levels fuelled a consumption boom across the developed world. These same statistics can be seen across many developed world countries, including the United States of America.

Alongside this consumer debt phenomena developed world governments have, themselves, increased debt levels to historically high levels on a par with war time debt to gdp percentages. In addition many other “off balance sheet” methods have been used to finance expenditures in an attempt to hide how serious the debt explosion has become in the public sector. A good example is the UK’s Private Finance Initiative or ‘PFI’. This scheme has encouraged (and enabled) a sale and lease back method to finance government expenditures. (According to recent research the UK’s “PFI” schemes would add an additional 239bn pounds to UK government debt or 20% of GDP).

Given this combination of an unsustainable increase in consumer and public sector debt it has become widely recognized by economic professionals that developed world economies have reached a structural headwind. Debt levels cannot be increased further as the debt servicing costs would quickly overwhelm their finances should interest rates increase even marginally. The developed world system is on a knife edge due the over hang of debt on its consumers and governments.

In spite of this fact Western governments continue to make unfunded future commitments for health care and pensions. These future, completely unfunded social welfare commitments, are coming due in the next few years as the ‘baby boom’ generation are about to retire.

The consequences of these combined factors of high consumer debt, high governmental debt as well as unfunded social welfare commitments that fall due in the next few years must result in a significant increase in taxes that are tax resident of the major developed world nation states.

This chart from of projected taxes needed from the US Budget Office, itself. This is repeated across the developed world however.

Professional analysis of balance sheets of most western states demonstrates many are close to insolvency at present. This is why we also see most western central banks monetizing debt, alongside continued high deficit spending, alongside low consumer savings rates and increasing taxes.

The welfare obligations, current and future, cannot be met mathematically no matter if unemployment levels were cut in half and tax revenues increased. Therefore, in addition to increases in taxes, inflation, or the debasement of paper money, is being employed as a tax method, in effect. This means the value of the welfare commitments will remain unchanged but the purchasing power of these benefits will be dramatically cut via inflation.

The social unrest implications of governments being unable to honor the expectations of their societies is no less than earth shattering. Equally, the future capital losses for holders of government paper debts (bonds) will also be no less than earth shattering.

Debt monetization always eventually creates inflation. Capital gains tax implications over the next few decades of this compounded inflation should be clear. Governments must rebalance their books. Inflation of asset prices will create notional capital gains of which a significant proportion will be taxed and spent on rising unfunded social welfare commitments. This process is already in motion across the developed world.

Decades of over consumption has transformed developed economies into consumption economies where nearly 75% of their economy is tied to consumer consumption. The government sector has ballooned as manufacturing has declined.

Here below a chart of US combined debt excluding future unfunded social welfare commitments (health and pensions, etc). Including future unfunded commitments the situation is even worse.

But it is not just a US phenomena. Here below a chart on the UK’s situation vs the g10. Care of Morgan Stanley’s economic research team 2012. (Note Morgan Stanley show the US in a better position vs her g10 rivals. This more positive US picture is a highly debated issue).

The UK’s situation, regarding her exposure to debt, is so relatively bad due to her economy having the largest exposure to banking. The financial sector of the UK holds the largest GDP share of any developed world economy.

Developed world government fiscal budgets now represent a historically high, peace time, proportion relative to the size of their economies. These factors have contributed to creating huge trade imbalances and ballooning annual deficits as de-industrialisation and unemployment has taken hold. Research and development as well as capital and machinery investment have declined year on year in developed world economies for the last few decades.

Another consequence of artificially low interest rates has been a collapse in developed world savings rates.

Japanese, UK and other developed market consumers have responded in exactly the same way to artificially low interest rates.

Bubbles in asset prices caused by artificially low interest rates have deepened the problems as capital (human and material) has been misallocated to needless industries. A good example is Spain’s property boom where nearly 1m housing units stand empty and hundreds of thousands of workers with construction skills now have no economic use as they were misallocated from an unsustainable bubble caused by the mispricing of risk and interest rates by central bankers.

As we can see, since the 1970s debt (public and private) has brought forward consumption from the future to sustain artificial demand in the present. Governments entered into this gamble willingly and with full knowledge as no one likes to live within their means. Democratic political leaders (of all colours) always want to be reelected so its normal that the hard budget choices get put off and debt is increased.

We have many indicators suggesting to us that the day of reckoning is now fast approaching us. The consequences of this monetary mission impossible must result in a transference of wealth from one group to another. Quite simply the western governments are, on the whole, approaching insolvency. The usual, historic, response by governments when they reach this insolvency is to monetize their debts. This historically results in very high and in some cases hyper inflation. The people who pay the price are pensioners, savers and or capital holders.

A similar set of circumstances developed in the 1970s across the developed world. At the start of the 1970s however consumer debt in many developed economies was relatively very low at around 40% of gdp vs where we are today. In the two decades from 1970 to 1990 consumers doubled their debt levels. This cushioned the effects of inflation (or money debasement) and lead to real income growth though this was merely achived through increase of debt to gdp. This strategy cannot be employed now as debt is so high for western consumers.

It has taken decades to get to this level of combined debt to gdp at a time when the “baby boomers” are retiring with all the social welfare costs that this will entail.

We can see all around us that the ‘rich’ are increasingly being seen as the saviors for this liquidity trap. Some simple mathematical analysis demonstrates that the ‘rich’ are insufficient to plug the hole in western government’s finances. The middle and upper middle class will be forced to pay the bill eventually as they always do historically.

Tax havens are not simply about avoiding income taxes, capital gains taxes, inheritance taxes and sales taxes. They are also about protecting the property and capital rights of resident high net worth individuals. Tax havens pride themselves on allowing residents the free reign of their capital to invest across the world as they see fit. Tax havens do not have large segments of working class and uncapitalised people. They therefore offer a crime free, light regulatory and tax efficient base from which their residents can feel safe that their capital and right are protected and not about to be withheld by the arbitrary wishes of political leaders and segments of their electorate.

If you accept the above then you have an obligation to your capital to investigate what is on offer from a tax haven like Andorra. The devil is always in detail on these matters, of course. And these details are of the utter most importance at present due to the escalating issues facing the developed world. Tax revenues must rise to meet the rising social welfare needs of the developed world nations. This has serious implications for those lucky enough to currently have “wealth”.

Andorra has a long history of offering a safe haven to the people that reside within her borders. She should be at or close to the top of all international capital holders list of residency options to investigate. We would urge you to investigate and gain (if appropriate to your own situation) a residency place before it becomes a “crowded trade” and waiting lists develop.

Weekly Technical View..

The UBS team continue to expect a late Nov high beta rally. They site the 1.348 eurusd level as important too hold to sustain the risk on rally and sp500 1226. Lets see..

Weekly15-11

For my mind market watch here providing a rare ‘perfect’ summary of where we are..

http://www.marketwatch.com/story/the-bulls-need-to-punch-through-resistance-2011-11-14?link=mw_home_kiosk

Rich

p.s. With the pre election hype in the US in full swing here, for art lovers and haters alike, Mr Brainwash’s representation of Obama.

Stocks to Outperform Cash by, at least, 460%. Dow Target 61846

We cannot know how effective the debt monetization will be and therefore the degree of inflation and financial repression that will be called for. We can be 99% certain that the money printers will do all they can to implement the financial repression model as far as the eye can see in an attempt to rebalance the debt ratios over the coming years. Market timing things, in the short term, is always tricky but when you stand back and see the maths of the situation on a longer perspective the micro moves are pretty meaningless given the degree of monetization (currency debasement) that must occur.

I’ve put together a simple spreadsheet which illustrates some example inflation rates, how the system of financial repression may work looking forward on two asset classes. Ie cash vs stocks. Stocks earnings will likely underperform inflation but they will succeed in hedging much of the monetary debasement. Cash will be an appauling investment in the coming decade as more and more money is created through the banking system & central banks. The maths is not exactly complex but it is important to unpick the assumptions etc. Targets etc are actually completely meaningless in money debasement environment as i hope we all understand. I site the 61846 target on the dow as a function of the assumptions i have used. Imo the assumptions are not bold assumptions. They are fairly conservative i would argue. I actually suspect the dow will go much higher than this in $ terms as things get out of control in the coming years. Lets see..

inflation-cash-stocks

All the best

Rich

The Sovereign Debt Default Process.. Dc.Marc Faber

As discussed previously, we are getting ever closer to massive debt monetization by central banks and or the IMF due to the ever worsening fiscal position of ‘developed world’ sovereign entities. It seems to me a reminder for us all on the history and theory from specialists in the area would be useful here and now. I post up a couple of very informative links to this end.

Firstly, below is a 4 minute interview with Marc Faber (from early 2010). Here he very neatly explains the inevitable process we will walk through. The historical precedents are very clear and well trodden. There should be no surprises here for us. Volatility is at extreme levels so timing is always tricky but the direction should be clear to all.

http://www.youtube.com/watch?v=U-V-0MMB4mw&feature=results_video&playnext=1&list=PLBEA2407D4CB72CBB

The link i would like to add to Marc’s thesis explains the process of ‘financial repression’ which is critical in understanding the strategy of the world’s central bankers and political elites. We have to acknowledge that this strategy successfully ‘worked’ in the 70s to balance sovereign books. Mathematically it’s possible it could work again though the odds are narrowing ‘yoy’ for the success of this strategy due to the immense volatility the system is under. Here a good explanation of the process of ‘financial repression’ care of Jim Puplava.

http://www.youtube.com/watch?v=GU9EIZzCYHQ

Rich

David Einhorn’s Q3 Letter to Shareholders

Apologies a few days late with this one but here below the brilliant Daid Einhorn’s Q3 letter to shareholders. Ill run through his latest entries in the next few days and update this post. He has made some exceptionally good calls in the last few months inc Vod, Green Mountain etc. I see he has added GM which interests me. I covered his addition and comments re the gold miners recently in a separate post. I also see that in spite of his superb calls the various hedge funds that he manages are down around 6% ytd.

Benchmarking wise, this soothes my own personally average year ytd. I’m not sure David uses FX as a hedge and gearing instrument alongside his $ equity investments. A purely currency debasement cannot explain my out performance as, even at today’s prices, the euro vs usd has gained around 1% or so. ie $ funds should have outperformed vs euro funds to reflect this $ debasement, although 1% is pretty much noise.

Even a mild out performance vs Paulson, Einhorn and the many other super star fund managers is to be welcomed. Albeit on a ‘be’ type performance. Never mind that small detail.. lol..

Greenlight-Capital-Q3-2011-Letter

All the best Rich

Weekly Technical View.. Equities Vunerable

The UBS boys maintaining a generally bullish stance towards equities up to end q1 2012. Near term, equities over bought and due a pull back which could last to end of Nov. SP500 above 1883 is a buy.. Below this would set off some alarm bells. They are also bearish oil from 100 usds. They maintain a bearish gold view short term. Report attached. Apologies for the delay. I got my hands on the report yesterday am but ive been travelling and unable to post up. I’ll be more prompt next week. Weekly08-11(2)

Best regards

Rich