Dinosaur Day on Capital Hill ~ The Risk Averse Alert

Tuesday, March 01, 2011

Dinosaur Day on Capital Hill

Let's begin with a little fundamental analysis of our present reality...

When a Fed chairman appears before the U.S. Senate and expresses fear that, the U.S. Treasury soon might meet a day when it is unable to finance its debt there is a serious error in composition somewhere. Think about it. How can the lender of last resort be at risk of insolvency when everything the Fed is doing to sustain the mountain of insolvent claims it let grow wildly for decades, indeed, hinges on the unquestioned solvency of the U.S. Treasury?

There can be no doubt that, the U.S. Treasury's solvency must be beyond any question if the Federal Reserve's quantitative easing is to have any hope of proving a sane risk taken in response to what has been termed a "liquidity crisis." Yet the Fed chairman rather doubts the Treasury's future ability to finance its debt!

The simple fact of the matter is there is not one mortgage backed security on the Fed's book whose ultimate payment is guaranteed by some power of taxation the Federal Reserve either directly or indirectly possesses. However, the U.S. Treasury is not so constrained, as the Congress is able to raise capital via taxation to sustain the Treasury's credit worthiness.

So, if Treasury is facing some future funding risk, where does this leave all the insolvent crap the Fed has taken onto its balance sheet? Thus, the Fed chairman in casting doubt over the U.S. Treasury's future capacity to finance its debt effectively is admitting that, the Federal Reserve, right now, is hopelessly bankrupt.

If the extraordinary measures the Federal Reserve has taken over the past couple years were beyond reproach — if the spin woven into vogue fantasy claiming a turnaround is building steam were, indeed, substantive and sustaining — then Ben Bernanke might better have told the U.S. Senate Banking Committee today that, the sun could supernova and obliterate 98% of the earth's surface, and still the U.S. Treasury would be solvent.

But that's not at all what the man said. Big mistake, oh bearded one.

Speaking of the U.S. Treasury, its current head appeared today before the House Financial Services Committee to discuss GSE reform. In summary it appears the bi-partisan agenda in Washington is, first, sustaining the means for cheapening property in a controlled manner, and second, creating the framework for recycling property made cheap right back into the leveraged finance machine, attempting this in some manner capable of sustaining today's badly compromised mortgage securitization regime. Of course, this ultimate objective is couched in the pretty language of free markets, while going completely ignored is rapidly increasing contempt toward political bodies claiming to represent the national interest in promoting these tired schemes, let alone whether confidence can ever be restored, that still ongoing de-leveraging might finally be stemmed.

In my lifetime the disconnect between policy and reality has never been so glaring. Thus is substantiation given my oft-stated claim that, nothing but a great fantasy is presiding in the wake of the initial collapse of the shadow banking system over the 2007-2008 interim.

The persons of Bernanke and Geithner are the fantasy's captive promoters, as are many members of Congress, and as is the President of the United States. Yet great changes in environmental conditions threatening a once-thriving species generally do not extinct weakened beasts in an instant. Such is nature's history. Thus, today's standard bearers in government would better spend their time studying the demise of the dinosaur, that mankind's capacity for reason might more wisely seek to avoid chaos threatened by those whose livelihood's extinction already is a foregone conclusion, this a consequence of an irreparably altered environment whose former condition alone could sustain such fraud-rife endeavors as these engaged (and can no longer, no matter how much accommodation is given to their dying screams).

Yet being that all life generally is predisposed to act on behalf of its survival, those whose irrational ideology seals their doom might better be afforded empathy even in such comedy as mocks their fate, that this might be hastened without provoking violent resistance to nature's broom whose action forever is sweeping into the dustbin of history every creature no longer well-suited to the purpose underlying the establishment of altered conditions, such as continue being imposed upon a trans-Atlantic financial system whose moorings were destroyed over the course of the past several decades.


It is on this note that, historic changes to the composition of the Irish parliament following last Friday's national elections (raising probability that, the next round of crisis in the euro-zone could be imminent) represent a new vulnerability that could take a couple weeks to solidify in the conscience of those whose world is in the process of being destroyed, and only then lead to a panicked rush for the exits.

So, let's not discount the possibility that, a "rising wedge" forming off late-June 2010 bottom might require some days more before its end finally is reached. The view above extends thinking put forward a couple weeks ago in, "A Rising Wedge Completing a Rising Wedge." Here, wave c of 5 (still unfolding since January 31st) prospectively is seen forming a "rising wedge" whose upper and lower boundaries largely are confined to the same boundaries established thus far in formation of the larger "rising wedge" unfolding off late-June 2010 bottom.

Of course, with the rising wedge's lower boundary presently being challenged, an alternate view supposing top was reached on Friday, February 18, 2011 still remains in play. Judging by today's relative similarity to trading on April 30, 2010, a turn below this rising wedge's lower boundary could occur before the end of the week.

OEX 5-min

Yet a bounce along lines occurring on May 1, 2010 might first be in order, and a challenge of February 18th's top prospectively awaits this turn higher.

I am impressed by weak relative strength suggesting an abandonment of effort at propping up the market. Conditions conducive to collapse have been rather abundantly present thus far during the market's rough moments since 2/18 top. In fact, today's weakness demonstrates a measure of abandonment as could be setting up another "flash crash."

Bottom line, there simply is not much time remaining before one extraordinary vulnerability or another (and there are many) precipitates a dizzying decline in the stock market, destroying many a beleaguered dinosaur who today could be seen gasping in a place where their kind can not much longer survive if capitalism is to remain a viable means for promoting human progress.

Fast Money
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