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I'm with Mish in this debate of course, since a credit implosion trumps a money printer, I but have the utmost respect for the adroit Swiss. The two of them have much more in common than either has with most other money managers or commentators.

I totally agree with Faber that the US is not a civilized nation anymore, entirely due to the expansion of the state. I could say the same about the UK, Canada, Australia and most of western Europe. The whole region feels like a big kindergarten where the teacher wears a .380 and a bulletproof vest.

Now that sovereign defaults are finally looming on the public consciousness, export markets are shrinking, and the ratio of workers to retirees is still shrinking, it would make perfect sense if the market started to tack a risk premium on all things Yen.

Technically, you can see the weakness of each advance against the USD for the last two years:

Prophet.net

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USD and US T-bond bears take note: the Japanese are a generation ahead of us in the Kondratieff / credit cycle, and theirs may foreshadow our own experience in winter.

Prophet.net (I’m going to miss these guys — they were bought by Investools and they are shutting down the site)

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Here’s a quick look at the pattern in the long bond, noting a possible 12-13 day high/low cycle:

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I see the Yen is still moving in tandem with bonds:

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

This is akin to saying that when the price of a weather derivative on say a cold Florida winter increases, the actual chance of frost on the orange trees is higher, simply because some traders have a vested interest in that outcome.

Actually, if anything, the availability of swaps on credit cheapens the cost of that credit, benefiting the borrower, since lenders are able to shift some or much of the risk to third parties. The fact that some buyers of CDS do not own the underlying bonds only serves to add liquidity to the market and even further reduce the cost of insurance.

I suspect that when players like Angela Merkel blame swaps for Greece’s situation, they are being disingenuous and simply trying to extort hedge funds and other players in the market and win points with the public. In the case of Greek politicians, it is a very convenient way to shift blame.

Did you double check to make sure you landed on a bank’s website?

Do they really think this will help improve their image? Making their charity efforts the focus of their front page with a slick presentation might give some people the message that it is all for show.

It’s as if they don’t realize that the public considers them a tad disingenuous. Their website must have cost a fortune in design, development and consulting fees, but results completely missed the mark.

Scroll over the nav bar at the top. Under “Our Firm,” where in a typical website you might a find a rundown of products and services or a company history, you see instead “What we do for economy,” “Stimulating economic growth,” and “Strengthening the financial system.” Another tab is “Citzenship,” and another is “Ideas,” such as “Education and health” and “environment and energy.” Ugh.

This whole effort reflects enormous contempt for the public — throw some money around, put ethnic looking women on your front page, and people will forget about the mortgage bubble, the backdoor bailout via AIG, and suspicians that the sources of their $100M in daily trading profits might not be entirely ethical.

Although it’s easy for this kind of contrarianism to turn into unhelpful navel gazing, on Friday the level of despondency seemed to hit a new high (or is it low?) on the bear blogs. Posts and message boards are chock full of buzz about perpetual asset inflation powered by the Fed’s magical money machine and an ample supply of that tricky thing called “liquidity.” Visions of the 1990s and 2000s are offered as proof that the market can disconnect itself from any fundamental or technical backdrop and power to endless new highs. The January highs are trotted out as “points of no return” for the bears, as though the market is guaranteed to launch higher if it manages to cross that threshold. And with the market seeming to shrug off every negative news item from sovereign defaults to bank failures to continued hemorrhaging of jobs in the U.S., traders are unable to conceive of a “trigger” that could send stocks lower.

Meanwhile, take a step back and look at the technical picture the market is presenting at the moment. After a several-week buying frenzy in stocks, we have new highs in the high-beta Nasdaq and Russell indices, unconfirmed (so far) by the Dow and S&P. Friday’s 5:1 NYSE a/d ratio was cause for concern, but hardly a match for the 35:1 down day seen in the February selloff. The 17 handle on the VIX shows complacency in the option market. Bonds and the dollar remain very well bid, despite the imminent end to Fed purchases and the best efforts of politicians to dismiss the euro’s and pound’s woes as the unnecessary manipulation of nefarious speculators. After a period of sideways movement the currency DSI sentiment has backed off somewhat from its recent extremes. Sterling in particular seems to have taken over whipping boy duties from the euro for the moment, and may have just finished a failed breakout from a channel on the 1-month chart. I have entered a short position with a stop above the upper channel line:

Source: Interactive Brokers

If it tops here, crude oil will have put in a right shoulder on a ponderous 6-month H&S formation. A close today below 81.79 in the April contract would also create a bearish outside reversal bar (not shown):

Source: Interactive Brokers

Over the weekend Marketwatch ran a segment prominently touting “The Year of the Bull,” complete with an upward sloping line starting from March 1, 2009.

If immediate new highs are in store for the major indices I would expect them to be muted at best, following Friday’s buying frenzy and the outpouring of bullish sentiment and resignation from the bears. If all the indices turn and fail right here I would think we will put in a stronger, swifter leg to the downside than we saw in January. And with entries in various markets offering tight, well-defined stops at multi-week highs, risk/reward favors the battered bears for now.

“If we created the euro, we cannot let a country fall that is in the eurozone,” said Sarkozy yesterday before a meeting with Papandreou in Paris today. “Otherwise there was no point in creating the euro. We must support Greece because they are making an effort.”

EU leaders have so far refused to give financial aid to Greece and have ordered the government to cut its budget deficit, the EU’s highest, on its own. While Papandreou says steps taken this past week to slash the shortfall warrant more help from the EU, German Foreign Minister Guido Westerwelle said yesterday that his country is “not going to write a blank check.”

Of course, a Greek default would strengthen the euro, since billions in balances would go poof, thus increasing the worth of the remainder. A bailout here will lead to bailouts in every Mediteranean country, quite possibly including his own. Pray tell, how will creating hundreds of billions more euros firm up their value? On the other hand, if every nation in the eurozone but Germany defaulted and then quit the euro for their old pesos, lire, francs and drachmae, it would be very strong and the Germans would just rename it Deutschemark.

Papandreou is visiting Berlin, Paris and Washington after his government passed a 4.8 billion euro ($6.5 billion) austerity package on March 5. A poll published in To Vima newspaper today showed 51.9 percent of voters support him even after the cuts, compared with 47.5 percent who don’t.

Sarkozy, who didn’t say financial support would be forthcoming, will meet Papandreou in the Elysee Palace around 6 p.m. local time. They will brief reporters afterwards.

Watch out, Americans. You don’t suppose that this American-born, Harvard-groomed oligarch is trying to take your money to prop up his racket, do you?

Final Resort?

Papandreou is indicating that Greece may still need financial support and is prepared to turn to the IMF if necessary, calling it a “final resort” on March 3.

That prompted a rebuff from European Central Bank President Jean-Claude Trichet a day later because finance officials fret such a move would signal the EU isn’t capable of solving its own problems. Italian Finance Minister Giulio Tremonti is nevertheless refusing to rule out a role for the IMF in any aid package.

“The IMF should act as a bank” in any rescue, he told reporters in Venice yesterday. “We finance the IMF so it can use the funds around the world. Why not use that capital with the IMF acting as a bank with its know-how?”

Tremonti also said that the EU could issue “eurobonds” or coordinate the sale of euro-denominated government bonds to better counter “financial speculation.”

Sounds like a bit of a turf war there between the IMF and the ECB, each vying with the other to administer the bailout and control the situation for their respective backers.  The IMF gets much of its funding from the US, so let’s root for the Frenchman here.

As Greece calls for more help, Merkel on March 5 turned her focus to restricting the use of derivatives to halt “speculators” from exploiting countries’ budget deficits. Greece has done its work and Europe and the U.S. must now ensure that financial-market speculators aren’t allowed to inflict further damage on Greece or on other countries, she said.

Merkel shows she’s not above the dishonest game of shifting blame to the markets for having the gall to recognise that Greece’s credit risk might a tad bit elevated.

Regarding the markets, it is still my strong belief that we are in the process of making a top to last for many years, on a weekly as well as yearly and even decadal scale, since the prices of financial assets prices are still stretched far above levels that could be justified by expected returns. History is not kind to buyers of stock markets yielding 2% or real estate yielding a gross of 5%.

Society used to go through these episodes of financial mania briefly and locally. The South Seas bubble in England lasted a couple of years:

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Close-up of 1720:

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The earlier tulip affair in the Netherlands started in the fall and was over by spring:

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In modern times, perhaps due to the ease of access that technology has brought to the markets and the emergence of a large middle class (though actually those explanations sound like feeble professorial BS), or possibly because of longer human lifespans (this I find more probable, as people need to collectively forget past experience in order to repeat it), we have the phenomenon of giant, recurring financial bubbles to accompany the credit/Kondratieff cycle.

One also has to note that the first such modern super-bubble began just a decade after the founding of a highly inflationary central bank, and that there has been no hard money nor hard-nosed policy since soon thereafter. After all, inflation is the expansion of money and credit, which always begets bubbles that are necessarily followed by crashes. These all-encompassing bubbles in everything are not healthy — they misdirect assets, squander wealth and shorten the time preference, which is no small thing. The young and already rotting cities of 20th-century-built North America are tawdry in comparison to those of Europe constructed in an age when real wealth was being accumulated at a blazing pace (yet inflation was non-existent or negative). People looked and planned further ahead, and built for yield and posterity, not to flip.

Here is a 200 year view of stocks priced in gold (DJIA for the last 100 years — approximation prior):

Marketoracle.co.uk

Isn’t that an interesting pattern? Looks like we’ve been in a huge megaphone since about the time of the Great War. The target for this leg is a Dow:Gold ratio of about 0.75. Dow 600, gold $800? Dow 11,000, gold $260 would have seemed pretty crazy in 1980, wouldn’t it?

This week’s strength was very impressive and could mean new highs on the Dow and SPX in the next couple of weeks if that previous wave is any guide. Our January-February ‘10 drop was akin to May-June ‘06, Feb-March ‘07,  and July-Aug ‘07. Tops are processes, bottoms are events.

Prophet.net

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Maybe the VIX will even scoop out a big rounded bottom and fall several more points:

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Note the advance:decline ratio I threw on there as well. This was a big up day relative to everything since last summer, with 5 stocks up for every decliner. These spikes during a bull trend tend to foretell that prices will drift up some more, though not always, and they do occur in bear trends as well, when they simply serve to clear the way for a resumed decline, as in late Sept ‘08. There is still a larger declining trend in the A:D spikes, indicating declining oomph during the strongest rallies, as in the year leading up to the Fall of ‘08.

The A:D ratio is also a measure of jumpiness. You can see how it spiked up as fear crept into the game in summer ‘07.

Of course, this market is now extremely short-term overbought and treading on very thin ice, so it could just plunge at any time. This could have been our clearing rally.

You can see that the daily A:D was nothing like earlier last year, but you still have to respect this signal.