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Reprise of 2007: Bear Impulses Down Likely to Accelerate

The markets are in frail shape. Friday's activity was particularly disturbing in that the markets could not even get the strength to use a prime setup and structural setup to squeeze bears. Markets made a swift reversal out of Buy Extreme resistance starting around 1:00 PM and never really looked back. While a continued bounce is possible very near-term (not that we are saying is likely or favored since probabilities are leaning the opposite currently), longer-term MSP and Daily MSP all suggest downward probabilities for the near future as has been consistently posted regarding this time frame on these pages. We thought it would be, considering the potential impulsive cycle activity developing in the markets, important to look back at the 2007 and 2008 period and topping process via several charts as published below:

2008 Daily Impulse Cycles

2008 Daily Impulse Cycles

2008 Weekly Impulse Cycles

2008 Weekly Impulse Cycles

2015 mcm Hindenburg Omens

2015 mcm Hindenburg Omens

From our post regarding the Janurary Effect in May 2015:

The 2015 January Effect: Status – On Track

Early in the year, we decided to do the most thorough study of all the behavioral and market structures possible to confirm or deny the veracity of the January effect. The resulting study produced the "MCM January Effect Model" with very interesting and powerful results.

The chart shown below puts a dim light on the outcome of this year. The rest of the report produced rather stunning results and to our surprise, proved that using a structured approach to a January effect could reveal market behavioral tendencies that are WAY beyond question concerning validity. Some data outcomes produced 96% win or loss rates with 60 to 70 plus qualifiers in the samples. This means 57 to 67 valid winners/losers out of 60 to 70 fulfilling observations.

This report is being refactored and will be available to members when that process is complete. Meanwhile, the data shown below sheds interesting color on 2015. Though there are a low number of observations out of 100+ samples, the methodology we used we feel is highly reliable which makes these outcomes something not to be taken lightly. Ideal turn timing is mid June to mid July.

So far, the year is tracking all the expectations pretty much as posted on these pages. Note that we have been consistent, not flipping our analysis since our first posts this year. We believe this is a significant difference from most analysis work that we have observed. The reason we are pointing this out is NOT that we need to take credit for acurate analysis during a challenging time for the markets as well as analysts - but rather because the advantages of objective, non-traditional data and structure centric analysis provides more relevant and valuable answers - it's just that simple. Even if such analysis is incorrect, its is still highly relevant because, as a basis, objective, and "fact-based" probabilities can be assessed. Failure to achieve them can be as important as achieving the probabilistic outcomes.

We have consistently posted the mcm-Smart Money Indexes, which have continued to deteriorate and most currently sit at 2009 lows - this is a decidedly troubling and challenging hurdle for the markets to heal as there has been a vicious sell-off going on for much longer than headline prices would seem to indicate.  (see:Drama in the Market Seas and Eye of the Storm: Smart Money Indexes Obliterated)

mcm Smart Money Indexes

mcm Smart Money Indexes

Currently, market facts are NOT FAVORABLE near-term and do not turn for several weeks.

The larger patterns hearken to rhyme with 2007 and 2008 and most certainly call for heightened caution. Central Banking may now have to start focusing on other issues than propping up the stock markets prior to their voyages into destabilizing negative equity as referenced in our IMAGINARY NUMBERS series.

If the impulses that appear to be setting up gain traction there could be quite a lot of damage done in a short amount of time. The primary hope for markets is to bounce NOW to better test the cyan impulse cycle breakdowns or they will most likely require weeks of downward price movement to dissipate downward energy sufficiently as to be able start a better recovery attempt. This is also supported by MSP directional projection probabilities suggesting that after mid-month in October the market is likely try to find footing for a significant upwards effort. Below are current impulses cycles that have been setting up:

2015 Weekly Impulse Cycles

2015 Weekly Impulse Cycles

2015 Daily Impulse Cycles

2015 Daily Impulse Cycles

 

Exceptional Day and Exceptional Times

Today was filled with outstanding eTickTools triggers, market impulses and emotions. Market eMotions are running at 78% above normal and  we got one x-tick after the other today for exceptional trading. quite amazing really. The changes rolled out and techniques discussed this weekend were extremely useful in trading crash oriented markets. So, on that front, things are quite outstanding.

However, on the market front, we felt that an update of the mcm Smart Money Indexes was in order. There is no shortage of jaw-dropping action represented in these indexes. For all the central banker jawboning, they really have "no real commitment" and are willing to let the people they claim to serve, endure unbelievable hardship. China has all but given up with their ruse and is actively  bankrupting everyone that it can find in order to support the "central planner panacea that all goes back ultimately to the Fed" and which ultimately goes back to theBank of England.

The only account balances that look any ok over the last few years are manipulation accounts (paper accounts of the central banks). Reality is that transactible mechanisms for these cartel members are fast declining, as is cooperation. The net worth and equity of the central banks globally is working hard to press ultimately into negative territory. Cooperation is declining because positive equity and are now moving towards negative equity - money printing in this respect is irrelevant. Though it is imaginable that if you, in a similar situation as the central banks,  could make cooperation aramgements with Prada to trade over-prices and senseless objects dejour with them while you have the perception od viability and they are desperate to sell them. However, if a sustainted period where you and Prada go into negative equity, their inclination to sell is hampered by their inability to do business just as yours would be. So, to go to Prada to spend $100,000 on a bag or sunglasses with -$1,000,000 in the account from which you plan on paying the bill with just an agreement of cooperation with an insolvent Prada who can no longer make, locate or deliver the object you seek is likely to not be a long-lasting venture. Initially, Prada may give try to come up with some terms for them and you to record the sale on their balancesheet, but very soon the mat in front of the Prada store for you and Prada would be gone. So much is similar for a central banker with such decrepit math skills.

The mcm Smart Money Indexes demonstrate clearly that markets have only just begun this move. Many traders may be feeling left out or way too left in. However, the implications are traders resentful of not having closed longs at higher prices are goign to end up quite  a bit more resentful in short order and those who feel like they missed the short of a life time - will soon if they do not focus on the setups that are only JUST BEGINNING. The market move has barely started is not anywhere near complete by all the measures we can see, In the near-term we still anticipate, via MSP data, some strength emerging this week into week 1 of September followed by decline and then strength into the week of the 21st followed by what can likely be a larger cash than the current down move - unless the arrogance of central banker meets cooperation and commitment on a massive scale of course -(which seems unlikely). So, to the charts - further explanation not necessary:

August 25th, 2015 mcm Smart Money Indexes Update

August 25th, 2015 mcm Smart Money Indexes Update

'Building Pretend Markets Not for the Good of the People"
- your friendly neighborhood central banker

From the perspective of a criminal mind, the screen-capture of the Bank of England website below is disturbing on many levels. Firstly, central banks, of all things, should NOT be focused on "BUILDING ANY MARKETS" they should be focused on maintaining the sanctity of the currency and the banking/financial system. It is absolutely stunning that they would admit, in such heavy-handed language, to "BUILDING MARKETS". Secondly, IF one were a large institution or firm of any kind, the choice of words used by BOE implies an objective that just does not fit with an authentic of organic venture. In fact, it implies an effort to convince of something in slight of hand fashion. To sell a scheme - a perspective. Any self-respecting firm would most certainly use any other combination of words than those chosen by BOE: "Building modern markets for a modern world" or "Building Innovative, Advanced  and Safe Markets for the World" come to mind as more of the line of thinking that a normal, authentic non-criminal enterprise might use.

However, a cult leader and or a criminal mind would certainly go through the greatest amount of effort to describe something in grossly deceptive fashion, by using the obvious and simplistic approach of using the very opposite words really apply. And this in a vein attempt to distance from the real agenda or implications. Normally such a technique does not work well or long...hence the word "REAL" and the word "GOOD" must clearly be inverted in the BOE usage, The real operation being undertaken by the BOE is more likely of descibed with the use of  "FAKE" and "BAD" instead. The gaul of this public facing message in these times is truely representative of the thinking en-masse of the central planner mindset - arrogant beyond belief and decpetive beyond reason.

When viewing the mcm Smart Money Index and Gap Index above, consider the implications of the below in understanding what is really occurring.

Central Banks Bravado and Arrogance is so complete that they are not embarrassed to virtually admit the truth

Central Banks Bravado and Arrogance is so complete that they are not embarrassed to virtually admit the truth

IMAGINARY NUMBERS – Part 2: The Shattering Mirror of a Centrally Planned Monster

If you can think like a teacher who cheats, and look again at the sea of data - patterns come to light. Patterns, which are subtle, buried under mountains and mountains of data. When looked at through varied lengths, suddenly it's just as clear as day. And when you know what to look for - You can't help but say [when] it has to be cheating.What he's really good at is: "PRETEND[ING]". He's a cheater a criminal, a thief, a cheat - all these things because really he's not far from it. I mean if you really think about what an economist is - the line between an economist and criminal is terribly thin.

Steven D. Levitt & Stephen J. Dubner (23 minutes into documentary Freakonomics)

As the Steven & Stephan said above, when data is looked at via varied lengths and modalities - suddenly things can become as clear as day. This article is not seeking to endorse Austrian economics or debase Keynesian economics - rather it is focused on the data. We are probability and data analysts/statisticians. This article seeks to go into some considerable depth regarding the examination of the statistics and data whose subject was begun in the previous article: IMAGINARY NUMBERS. Hopefully, this presentation also derives implications that can be clear as day.

These days, the line between monetary planning and criminality appears to be very thin indeed. Malinvestment, asset manipulation, unimaginable leverage, theft, distortion & falsification, goal-seek & curve-fit data, false pretenses, special interests and every form of systematic, media & political manipulation - central planners/bankers have metamorphized the benevolence of their supposed task into an art form of criminality on a scale that even the largest criminal syndicates in history would and could not conceive or dream of executing in their wildest fantasies. If this paragraph sounds like a stretch, let alone a mouthful, please consider the accompanying charts and content before making your interpretation.

Shattering Mirror -  unmasking the FED Monster

Shattering Mirror - unmasking the FED Monster

REPRISE

Previously, on examination of the machinations of GDP (and by reference CPI and PPI) it is clear that the greatest area of innovation and growth in the US economy (and others too) is in the areas of "productive" economic contributions that do not require official transactions, can not be proven (and, therefore, can not be easily disproven) and employ new and fantastical techniques of conjuring. MAGIC.

We have touched on the subject of the astounding growth rates of imputations and hedonic adjustments but have not put them into broad perspective. This article seeks to add detail and perspective for the earlier observations. In light of broad data that can lead to some objective conclusions, we, therefore, examine many dimensions of data in detail: government/FED data, reporting, statistics and analysis.

The Federal Reserve System provides a database called FRED that is available from the St. Louis Federal Reserve. This database presents a whole host of variables with which one can see a vast amount of data - much of it useless and inaccurate. If the huge amount of effort that has been put into these data stores were accurate and useful, it follows that the FED would have at least been aware of any one of the issues leading into 2007 and 2008.

In 2005, 2006 and certainly by 2007, at least ONE of these should have been identified:

  • An Approaching Recession
  • A General Bubble
  • Asset Valuation Extremes
  • Statistical Aberrations
  • Housing Bubble
  • Credit Risks
  • Derivatives Risks
  • Earnings Risks

However, as is most often the case when one seeks to engineer data to bias a specific scenario, it becomes quite impossible to look at and for that which one is struggling so very hard to avoid. As it stands, most all Central Planners, especially the FED, missed every single one of the above issues.

IT'S NOT WORKING

Since the 1960's debt and leverage have expanded by orders of magnitude over earnings as reflected in the charts below. Tremendous leverage seems to be primarily shifting money from one account into another, with inevitable risk, depreciation and spread eating away at it. This is providing negative real economic impact, which can also be seen in the charts below. This negative impact can be interpreted directly from a look at the unimaginably large leverage increases resulting in a roughly net zero impact (or worse) in real economic terms. Globally, central planners have attempted to leverage as much as possible. More than imaginable. The thinking apparently is that ultimately this persistence would at some point break the resistance of people to accept finally the virtuous cycle they imagine. In most cases, central planners have more and more often resorted fiddling with data, as it is clear the FED has been doing. However, this is just another ploy to try to break the psychological resistance people have to the central planners ever near virtuous cycle. These are the basis for ever more and more credibility destroying, unsustainable and highly questionable policy.

DETAILS

Please click on the navigation buttons on the chart below to scroll through each chart. There are 17 charts and you can navigate via the location dots at the bottom of the chart or the left and right navigation arrow controls. We recommend that you click on the title link to view this article in detail which will then accommodate the largest chart sizes.  The method of viewing the charts below is quite effective because each fades into the next which makes it easy to track the changes from one chart to the next. If you would like to refer to a gallery, here is a dedicated page with thumbnails of all the charts.

  • Imaginary Numbers - US Population Growth

  • Imaginary Numbers - US Population Growth vs S&P500 Price Appreciation

  • Imaginary Numbers - US Population Growth vs S&P500 Earnings

  • Imaginary Numbers - US Population Growth vs S&P500 Earnings (Float Shrink Version)

  • Imaginary Numbers - S&P500 Earnings vs GDP & Earnings Per Share

  • Imaginary Numbers - S&P500 Earnings vs GDP

  • Imaginary Numbers - S&P500 Earnings vs Price Appreciation

  • Imaginary Numbers - S&P500 Earnings vs Price Appreciation

  • Imaginary Numbers - US Government Debt in Perspective

  • Imaginary Numbers - Welcome to Money Amplification

  • Imaginary Numbers - Overall Leverage In Perspective

  • Imaginary Numbers - Amplification

  • Imaginary Numbers - Overall Leverage In Perspective

  • Imaginary Numbers - Can GDP be Believed

  • Imaginary Numbers - High Wire Act

  • Imaginary Numbers - No Other Conclusion

DERIVATIVES

Since Alan Greenspan attempted to stabilize the markets out of the 1987 crash and the deep recession into the early 90's via any means necessary, derivatives and productivity became absolutely wonderful sound bytes in the 1990's to project a "NEW" era of order, stability, prosperity, growth etc. Nothing could have been further from the truth. It only takes a brief look through our charts to see that the productivity hyperbole was nearly a complete fabrication. Sure, new technology enables more efficient process and operation, however, the banking system and the tremendous debt and interest obligations of the "NEW" era quickly absorbed and re-purposed productive capital and energy into the wasteful and tangential elements that rewarded fools and penalized producers. Ultimately, producers figure out the trick to getting their slice and realize that they are better off trading and playing the game than doing something productive.

Fed Monster Hooved & Clawed

Derivatives, risks have increased for many reasons. Primarily stresses on real liquidity and real collateral. However, also because the markets have grown...now receded. Much derivative risk can not be quantified because it is NOT exchange traded performance bonded. With the FED's roughshod through the house of mark-to-maturity, mark-to-excuse-du-jour accounting - these risks are covered up behind the back room trap door. The one thing that is certain, like the Greece debt debacle is now twice the size it was just 4 years ago when every financial TV journalist indoctrinated the world with how irresponsible the Greeks were and how they would never be granted any credit with the large Central Banks if they defaulted...the Derivatives problems will likely be MUCH bigger next time. Why? Similar to Greece, AIG, Bear, Lehman the Central Banks rewarded imbeciles and have sought every technique known to man to avoid deleveraging...even if it means having to make up numbers to loan Greece 340,000,000,000 when it's clear they had just effectively defaulted on their previous obligations. Call me stupid, but Greece is not at fault here. The bankers ramming sovereign debt issued by insolvent nations to yields of 2% and below with a "take no prisoners" approach are responsible for Greek's inability to repay. Who does Greece think it is anyway - Ukraine?

From a rational perspective, central planning revolves around the concept of data dependence and disciplined application of structure and rules. What Kind of structure and disciplined application of data is it that both grants a state in full default - Ukraine - funding, and simultaneously, a state that is in paralysis but far more manageable situation - Greece - no funding? What kind of data can possibly support these types of contradictions? Most likely none. This leaves a perfect entry for discretion and data engineering to adapt the situation to a desired outcome with no discipline whatsoever. Perhaps, discipline is evident in no other form than the ticking boxes that indicate data was used in the analysis process?  If this is any example, then are central planners acting as glorified discretionary managers regardless of data or mandate? The implications are clear, for the charts presented earlier, no self-respecting data analyst would entertain the protocols that have been undertaken. However, a discretionary process supported by constantly revised data and mechanics fits the bill very well indeed. Could this be the reason that central planner decision making is so persistently rhyming with thinking that are so highly irrational and biased?

If we look at derivatives and say that we know 50% of what is going on. OTC derivatives stand at $650 trillion dollars; this creates a variable in our 50% scenario of $325 Trillion. Considering that OTC represents only a partial representation of outstanding derivatives risk, using only this 50% of reported positions as a basis is a reasonable hypothetical. A few capital calls, accidents, counterparty failures, settlement or shadow derivatives issues later and a small problem might become unmanageable risk of 12.5% of $325 Trillion - or over $40 Trillion - easily higher. These are gargantuan numbers, and there is NO plan B.

Given that the FED has proven that they have a mathematics deficiency. Could this deficiency be a side effect of having a dopamine laced “Control-P” key? Regardless, of this debilitating condition, all the issues presently are more untenable than they were in 2007. Yet the FED is sanguine and "la sai fare" of the risk of achieving negative equity of under -2% on its own equity. So, it is continuing seeks to find ways to expand leverage at just about any cost.

The quality of life and stress levels for 98% of people are high because 98% lines up very well with the little blue sliver on our charts called “the population." The population has 98% percent risk while the 2% has 98% potential as can clearly be seen in these data presented here. How can quality of life for Greeks or Americans get better when linear extrapolators who are practically, philosophically and mathematically challenged like Mario Draghi, Ben Bernanke, Janet Yellen, Alan Greenspan, Haruhiko Kuroda, Christine Lagarde are in charge? Debt servitude has only one result, no matter how much dopamine is added to the Control-P key.

DECEPTIVE DATA

The significance of the chart below is that it shows the dramatic distortions being spouted from the mouths of Central Bankers versus the facts in the real world. This chart demonstrates the dramatic amount of debasement and credit that has been irresponsibly pushed as the solution to growth problems, yet has produced little REAL growth over 120 years.

The FED knows this. However, they seem to accept that engineering numbers to suit their current mood or agenda without much of a quandary. Real Earnings Growth (a product the FED does not market) is following the trajectory of the US population growth over the last 145 years. Debt and modern financial weaponry employed for money amplification have grown in the real terms by many orders of magnitude more than earnings. Is it any coincidence then that it is those very products marketed by Central Bankers to the world? Clearly, it makes no sense to see S&P500 earnings and sales so out of kilter numbers reflected in GDP or CPI/PPI. There is simply no plausible defense to be offered by people whose math skills enable them to create the dichotomy between Nominal and Real performance as represented here that would convince a reasonably sensible person as to how 2 + 1 = 4 and the GDP numbers are perfect.

So, in closing, the Monster has still not got a face, but it is being revealed. The only way to avoid its wrath would be for Central Banks and governments to get back to sound practices with regard doing their jobs and maintaining sound data, analysis, and currency. This would require tough choices and a keyboard with more than simply a “Control” button and a “P” button that is so profoundly used and evident in our charts.

As our recent example, IMF will willingly lend to a country in complete and current default - Ukraine thereby prolonging its agony and impoverishing any potential its future economy may have had. At the same time, IMF/ECB wish to appear prudent with an impetuous Greece, who suffered a similar fate as Ukraine a few years ago. Ironically, IMF and ECB are marketing debt - its all they have to sell…how long will it take them to figure out some scheme to further leverage the > 98% and empower the < 2%?

Sadly these are not choices that the Central Bankers will make easily, or willingly. Many will likely require judicial consequences in their various lands to alter practices. This monster looms large…it has not shown its true face but the mirror is shattering and in every shard will be a reflection of the beast - a beast that looks rather unlike the sanguine figures of central bank leaders.

One thing is certain, appearance of this creature will be anything but pretty.

Imaginary Numbers - Not a Pretty Picture

Imaginary Numbers - Can You Afford to Believe Them?

 

Addendum

Imaginary Numbers: Article Charts

Imaginary Numbers: Click for Article Charts