Approaching Another Lehman Moment ~ The Risk Averse Alert

Friday, September 07, 2012

Approaching Another Lehman Moment

"Unbelievably," the insolvent albatrosses of the trans-Atlantic banking system had another stellar day. The only thing explaining this at a time when the euro-zone banking system's insolvency inexorably is moving toward Europe's core economies is that another "Lehman moment" is fast approaching—this time, however, portending a far more devastating impact threatening core debt structures. So, with time to fake all is well near expiring, likewise is opportunity to stick suckers with many a piece of garbage about to take a dirt nap.

While hopelessly trapped central banks are presented as being on the case, their real capacity at the moment in fact is but reduced to all talk and no credible action. Chances are, too, the Fed will be worked next week in some manner similar to the ECB this week, although certainly unlikely to make any earth shattering announcement projecting some phantom power, as it is election season in the U.S. and the gospel according to "Europe has the resources it needs to deal with its own problems" already was read this week. Yet work the rumor mill into the FOMC meeting Team Fraud's oh-so penetrating, captive media, no doubt, likely will be picking up where coverage of the ECB left off: chirping about an insurmountable crisis' resolution with but more planned purchases of "assets," while remaining deafly silent about lender of last resort inaction justifying the market's bid on sovereign debt otherwise hopelessly insolvent. Surely too, no one will bother to ask why the Fed should even consider announcing another round of QE when markets appear anything but illiquid. As chance also would have it, there's math revealing the degree to which the Fed is trapped. Truth is neither the Fed nor the ECB possess resources enough to act with decisiveness up to the task of cushioning the trans-Atlantic banking system as its insolvency spreads to Spain, Italy and France.

So, the final days for many a hopelessly insolvent bank and financial are upon us. Monster rallies accompanying mere talk from central banks exploiting a terribly broken market pricing mechanism are made for trapped, weak hands to offload the last of their own garbage before many an albatross is soon laid to rest as the EMU is brought to its knees.

Yet none of this changes the big picture, Elliott wave view presented here over the past couple weeks. Unlike 2008, lenders of last resort today are proven witting swindle perpetrators, as well its victims. Central banks have been on the case from 2008 to present, willfully having joined the banking system these euphemistically "oversee" in its insolvency every step of the way over the interim. However, the taxpayer backstop still to this day is proving not so easily swindled. Yet we know what this takes. All the ways and means are in place to make the next "Lehman moment" a different affair than the original, with hyperinflationary juice pouring forth more freely much sooner.

There most certainly will be another "Lehman moment," too, and probably sooner than any central banker dares admit. During the evolution of this coming crisis wave (b) [of B] of an a-b-c "zig zag" forming off March '09 bottom should complete. Following this likely will evolve a hyper hyperinflation but further backstopped by taxpayers only the more completely extorted. This quite possibly could evolve in a fashion eventually offering up the next generation to barbaric acts of human sacrifice (war), that securities which to monetize for the sake of propping up today's otherwise bankrupt imperial order be brought forth. Once the open-ended dynamic of something like this has become entrenched (not to say war is the only possibility, but its likelihood given today's trends appears anything but remote), wave (c) of B higher, likely already having begun upon the mere anticipation of endless taxpayer backstop, could find the market in a favorable position whereby its subsequent gains more or less are a foregone conclusion.

Eventually, though, wave C down completing an Elliott a-b-c corrective wave from Y2k will develop, placing major indexes on a trajectory targeting levels last seen in the 1987-1994 period. Just what physical circumstance might accompany financial calamity leading major indexes to suffer a broad setback rivaling the 1929-1932 period is hard to say, yet a 1923 Wiemar Germany-like experience cannot be ruled out.


First off, some minor housekeeping... Today's extension of yesterday's advance lifted index relative strength to its highest reading since early-June bottom, while the CBOE Put/Call Ratio was driven to its lowest level over the same interim. Both measures suggest there are more suckers to excite before a thorough fleecing begins.

These same measures (among others) also present ample evidence suggesting any further advance could be limited. In fact an entirely unconvincing technical backdrop presented as the S&P 500 approaches the vicinity of its overhead resistance relegates to the domain of irrational exuberance widespread excitement over the prowess of lilliputian central banks in the face of desperately trapped banks and sovereigns buried under a mountain of debt.

Overhead resistance depicted above carries back to a view presented here in April in a post titled, "Substantiating a Revised Outlook." The S&P 500's long-term monthly chart revealed a "dynamic line of support-resistance" around which the index's gyrations over several decades showed this line curiously dividing the component waves of the Elliott wave that unfolded from the S&P 500's 1974 bottom (this being the 5th wave of five waves up from 1932 ending in 2000). Since Y2k top this line gave support to waves (a) and (b) of A, then gave out in 2008 in formation of wave (c) of A. Waves (a) and (b) of B up from March '09 bottom have been contained by resistance met at this line. This looks to continue in the current test of this line's resistance, with there being no shortage of technical evidence indicating the market's underlying state in some ways no less weaker now than in 2008.

The projected objective for wave (b) of B drawn above is based on the S&P 500's trend line from 1974 bottom. Wave A down from the S&P 500's Y2k peak reached bottom in 2009 right at this trend line. It seems reasonable to expect wave (b) of B might prove this trend line's second retest.

Wave (c) of B following might find overhead resistance (such as currently is being challenged) taken out during formation of its 3rd wave of an expected five waves higher. Were this to happen, then wave (c) of B might not complete until reaching the lower end of the channel containing the S&P 500's advance from 1974-2000. This line proved resistance during formation of wave (b) of A unfolding from 2003-2007. Being this line obviously continues trending higher, any future challenge of it could see the S&P 500 rising upward to somewhere in the vicinity of 2000-ish before wave (c) of B completes.

Once the market bottomed in 2009 it occurred to me that, if its continued decline—minimally targeting major indexes to levels last seen in 1994—somehow were to be forestalled a considerable time spent levitating would need to develop. Not at all did I think this outcome likely. Only this year—three years after the fact—did I even begin to entertain possibility a trip back to levels last seen in the 1987-1994 period (minimally) might be delayed for a considerable while longer. Seeing willingness to keep the market levitated merely on the promise of more central bank largesse is persuading me that, an Elliott wave view delaying the market's inevitable, deep retracement should be thought a credible possibility.

Now, I'm certainly not sold on any possibility of a return to the status quo of the Greenspan era. Gone are the days of a shadow banking system equipped with an infinite multiplier needing no pervasive and direct backstop from lenders of last resort. Here to stay are days of consolidating physical and financial assets, extending leverage while more overtly decimating labor to the point of its sheer desperation (this contrasted to the more covert approach imposed via globalization during the post-Bretton Woods era). This process has but just begun. But install in positions of political leadership smooth talking fascists and it's likely the art of swindle will be further refined to the effect of allowing an oligarchical imperial dictatorship (a.k.a. the Fuehrer) to pretend it possesses some vital legitimacy worthy an ever-increasing measure of sacrifice demanded as price to sustain the fantasies it peddles as though these represent the most treasured realities ever conceived by man.

That the "free market" is a fraud is obvious to anyone who has bought into it, yet seen their share of it in steady decline for well over a decade now. Presently, the negative social effect of Americans who buy into Ron Paul's libertarian nirvana all the better sets up for compliance with the full measure of sacrifice the Fuehrer demands, as political representation these days finds bi-partisan consensus in obeisance to an austerity regime freeing up both finance and [slave] labor in a venture to further increase leverage necessary to sustain that which already has long been driving the physical economy into the ground. For a brief time this mistaken political current might appear rewarded, much as the globalization crowd likewise appeared until the shadow banking system imploded. This won't last, though. Eventually, the investment deficit throughout the physical economy will come home to roost in financial collapse to match the ongoing collapse in the intellect of free men mindful of the unique role the United States could be playing to lead the world purposefully spreading the fruits of its Revolution, a role in fact it has abandoned in subservience to an imperial dictatorship principally run out of London and sold as something desirable (which in truth all too apparent even now it is anything but)...

Fast Money
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