A Nuremberg Moment at the Fed ~ The Risk Averse Alert

Thursday, January 03, 2013

A Nuremberg Moment at the Fed

As I just said the other day, have no doubt Capo Confetti and crew are well-aware their experiment hyperinflating a dung pile of illegitimate, unpayable debt is fraught with risk of spiraling out of control. Confirmation of this came today with release of minutes from the Fed's December 12th policy meeting. Yet despite analysts who claim the Fed is confusing markets with exposure of increasing internal divisions over the efficacy of its QE policy, there should be no confusion whatsoever. Rates on core Treasury securities propping up the trans-Atlantic banking system simply must be held down, if not continue falling.

Truth is QE serves to manage—slow—the rate at which capital fearfully migrates to the core.Were this policy to be curtailed or, god forbid, terminated, an avalanche into U.S. Treasuries in all probability would ensue, and this at the expense of every other financial asset right down to the bottom of the capital structure. To the trans-Atlantic banking system this effectively would spell doom.

In fits and starts we have seen this dynamic play out over the evolution of the Fed's QE policy, from its inception in 2009 leading to sweet nothings about an "exit strategy" then followed by evermore decided doses of reality revealing that, a dung pile of debt sitting atop a persistently contracting physical and financial economy positively requires endless QE. Yet still broader reality wherein contraction exposes risk as only the more grossly mis-priced as a result of QE, this in the face of margin pressures—born of imbalances—whose effect only serves to hasten but further contraction still (and yet greater imbalances), now but finds an increasing number of Fed policy makers finally recognizing the sad, fateful truth they are, indeed, trapped.

Nevertheless, effort to manage this awful dynamic is likely to persist. The balancing act between contraction and hyperinflation-induced mis-pricing of risk presents a Weimar School pathetically feigning credibility presumably founded on lessons learned from the past. Yet austerity targeting debt-fueled spending bolstering demand for things outside the domain of federal operations supporting securities directly propping up a mountain of wildly mis-priced banking system "assets" stands condemned for what it really is: an inhumane, murderous, seditious policy that, only treasonous jerks could endorse, be it enthusiastically or with all due regret. Although most intimately revealed among such enthusiastic austerity advocates is our Shadow Greek Prime Minister, Attilos, along with that gaggle of Austrian school fascists masquerading as Republicans in Congress, one nevertheless wonders, too, whether increasing numbers of Fed policy makers presently indicating regret are having nightmares of a new Nuremberg tribunal.

We can be fairly certain, too, today's truly astounding commitment to infinite QE in short order will prove woefully inadequate. Thus another message is likely being delivered by today's revelation of growing dissension within Capo Confetti's ranks. Some segment of wildly mis-priced "assets" are doomed to be left exposed in a capital short climate purposely manufactured by a Fed knowing full well the dire consequences of bailing out every last insolvent credit. Marginalization and consolidation are the Fed's antidotes venturing to prevent its decades-running hyperinflationary policy from spiraling out of control. Seeing full well the consequences of this policy thus far at the periphery, be it in the euro-tomb or society more generally, we can again be fairly certain whatever is the Fed's currently vague endgame, it will feature a social climate only the more rife with mass murder. Adolf Hitler probably is turning over in his grave with envy for what the London School of Economics has been able to achieve.


Now who among trapped weak hands holding more mis-priced trash than you can shake a stick at would not relish having capacity in calm moments to work a broken price discovery mechanism in a venture to maximize capital it both will need to raise over some indeterminable future, as well as will claim is backing its piece of a mountainous dung pile stinking up the banking system (a fact which the Fed's continuous, extraordinary interventions vividly confirms)?

The question for the ages now is to what further extent will the volume of shares exchanged contract, revealing those trapped can neither afford to ratchet up their fear (which would lead to increased selling), nor increase their stake in claims at the bottom of the capital structure? Yet diminishing volume no less than a year ago, nor since March '09 bottom, is exposing the utter unsustainability of the continued levitation of the stock market. Remember, "prices can fall of their own weight, but it takes buying to put them up." Furthermore, there's no "wall of worry" being climbed without such displays of fear as brings increasing selling whose supply is happily absorbed at higher prices. At present we have but a broken price discovery mechanism being manipulated, first because it can be, and second because a deep sea of trapped weak hands have no other choice but engage in the game, while at the same time keep all eyes fixed on the exits. Such price choppiness as we are witnessing in the face of a relentlessly rising cumulative advance-decline line while volume relentlessly recedes is screaming that, there is no such thing as a bull market in garbage.

As you are aware, several Elliott Wave Principle based alternative interpretations have been presented here over recent months, each detailing prospective Elliott wave counts over the interim since Y2k. Although no wave count is applied to the above chart of the NYSE Composite Index, as you can see a prospective "rising wedge" forming off early-October 2011 bottom has been drawn. Although I am not at the moment finding particular favor with this prospective interpretation, neither am I discounting its possibility. As the NYSE Composite Index has yet to surpass its May 1, 2011 intra-day peak, it is likewise possible that, forming off early-October 2011 bottom is no "rising wedge" at all. Rather, a "triple zig-zag" forming the "b" wave of an a-b-c "zig-zag" down from May 1, 2011 top could be nearing its completion. Time will tell.

Beyond suspect volume is fading momentum (see bottom panel) persistently negatively diverging at each new higher peak the NYSE Composite reached over the course of 2012. An additional, negative technical divergence is seen registering via the NYSE Composite's relative strength (see top panel), now versus mid-September 2012. All told, this hardly is circumstance supporting the viability of the NYSE Composite's gap higher to start the new year.

$NYA weekly

Although still decidedly lagging other major indexes like the S&P 500 and the NASDAQ Composite, the NYSE Composite Index lately has been outperforming these, and so is catching up a bit. Yet per what's imminently in store, I will argue unlikely is a double-digit percentage advance further lifting the NYSE Composite to once again challenge [rising] overhead resistance formed by the lower boundary of the channel containing the index's 5-wave advance unfolding from 1974-2007. The index's suspect technical condition revealed via its daily chart is but furthered via its weekly chart. In addition the S&P 500 is much nearer dynamic overhead resistance than is the NYSE Composite, and given the suspect technical state of both indexes, it's hard to imagine the NYSE Composite continuing its relative outperformance of late while at the same time both it and the S&P 500 remain below overhead resistance.

Moderately interesting here, too, is the fact the NYSE Composite has yet to decisively exceed the level at which it stood when Lehman Brothers took a dirt nap back in '08. Shall we call this a picture of shuffling deck chairs on the Titanic? It sure looks that way.

Word on the Street
* * * * *
© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!