Friday, June 24, 2011

The Moments Before Drowning

I sit. I watch. I contemplate. I observe. The stock market appears to have lost all sense of reality and logic. Maybe it never had any. Maybe it is just drowning and the current behavior is the moment before the drowning.
The Dow Jones Greek Index is a good barometer of investor behavior. When a person is perilously close to drowning, they will grab on to anything. There are a few seconds of desperate panic. The same holds true for investors. They will grab on to any story no matter how ridiculous it may be. The former nation of Greece is in the news almost every hour. They have debt obligations that they cannot repay and the ECB is going to throw them another $100 billion in bailout money to keep their debt off the default report. To be accurate, the ECB is going to give the $100 billion to the German, French, and American banks that hold the credit default swaps tied to the Greek debt in question. They just needed to figure out how to steal it from the Greeks.
Let me touch on one thing before we get to the chart. I referred to Greece as the ‘former nation’ of Greece. Since we are in a new era of government control and central bank intervention, we need new words to describe that which has no current description. The new word we need to commit to our vocabularies is ‘de-sovereigntized’. This is the result of a formerly sovereign nation surrendering to central banking mandates giving the central bank the authority to make laws in that country. The ECB, for instance, will now control Greece’s currency, taxation, debt repayment schedules, and business revenue collection. Greece has agreed to a ECB imposed austerity mandate in which the ECB will determine Greek tax rates, small business taxes, and monetary control. The Greek government no longer has control over key points that determine a nation’s real sovereignty. As a result, we can longer look upon Greece as a sovereign nation. They have ceded their autonomy to the ECB. They have been de-sovereigntized.
But stock investors don’t care about sovereignty. They rarely think about anything but making a buck. They rarely actually think! The chart below is the Dow Jones Greek Index. Why do I bring it up. Yes, it is down some 80% from its highs of a few years ago but I think it is a good example of a drowning market. Let us remember that Greece has a GDP of about $300 billion (US) and their economy is shrinking by better than a 4% annual clip. The government has already cut wages and benefits as the government controls more than 50% of the overall economy. The new austerity rules will increase the tax rate on the population by 1% to 5%. The threshold of income that begins taxation will drop from $12k per year to $8k per year. Even the poorest people will feel the oppression of higher taxes. Business owners will be accessed and extra $300 euro penalty for being stupid enough to own a business and hire workers. Like Americans to the American government, the Greek citizens are now enemies of the state. With that in mind, let’s look at the chart.
The long, clear candles from the last trading day of May, the third trading day of June, and those of the 16th and 21st were all four or five percent one-day gains. The all came on news that an austerity package had been agreed upon. The gold line on the chart is the S&P 500 so we can see that all indices basically move in the same direction these days. It is pathetic. It is mindless. It is thoughtless. It is a market in the last moments of the drowning process. Why would anyone buy Greece? They admit to be insolvent. Now taxes are going up. Wages are going down. Their economy is contracting. What kind of insanity drives people to put money in an investment like this? Are the last three trading days on the chart an indication of the trend to come? If so, the Greek index will resume its downward slide and most likely, so too with the S&P 500.
But wait! Here comes a life preserver. The IEA is going to release 60 million barrels of reserve oil. Of the 60 million barrels, the de-sovereigntized US will be responsible for 30 million barrels. The US no longer controls its currency or taxation. The currency is distributed through the Federal Reserve system and her taxes are deposited in Federal Reserve banks. 
Here comes a piece of drift wood. The Federal Reserve will continue to buy US debt and equity with maturing assets held on its balance sheet (now at $2.8 trillion). 
Here comes a piece of styrofoam. The government released some bogus data about economic recovery to excite us. 
Here comes a piece of plastic. The Plunge Protection Team is bloating up the indices in the last hour of trading. They popped up the Dow some 100 points in the five minutes that followed Greece’s surrender. 
Hey, we better grab something before we drown! Maybe the Greek index will float by...

1 Month - GRDOW in candlestick, S&P 500 in gold
Chart courtesy
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. 

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