MCM Newsletter – Outlook for Week 30 May – 3 Jun

Executive Summary:
Main Trend (weekly): neutral
Intermediate Trend (daily): up
Short-Term Trend (480&288min): up/neutral
Details:
The initial decline from the triggered resistance level on the weekly cycles has stopped when it tested the mcm-MA and the market managed to bounce from there. Now, price is close enough to the resistance level to be considered a back-test (highlighted on chart). What happens here will be key for the main trend direction, with the normal expectation being for resistance to hold and market to have a more pronounced correction. As it can be seen from the previous resistance levels, it would not be totally unexpected for the market to either head directly lower or challenge the resistance a bit more before that. The directionality tool should be watched closely for signs of down movement as well. Interesting is that YM is underperforming ES, being about 200 points below the resistance level, while ES is only 7 points.

Weekly Cycles

Weekly Cycles

On the daily cycles, we can see that the mcm-MA on the weekly also had help from the daily when it held. Namely, the market back-tested the bullish retrace (BR) support which had triggered a while back. That back-test showed that not all is as bullish as everyone thinks since the support held with difficulty and was spiked below. However it did hold in the end and market bounced strongly from there. Now an END resistance to that BR could trigger basically any time at these levels. It can also be seen even better than on the weekly cycles how significant is the YM underperformance - while ES went clearly above the previous high, YM did not and is in that general area. The mcm-MA on YM also turned red and we started to get some LRE (lower risk entries) for shorts. As previously said, once that END triggers, that would signal a possible unwind of the up impulse and in the context of the weekly, a larger down move would be expected. There is also the option that a 2nd BR will trigger and require a 2nd END, which would need more back and forth movement before the bigger correction.

Daily Cycles

Daily Cycles

The 480 and 288min cycles show the effect of the big move we had in the past 4 days. 480min actually broke into an up impulse, while 288 had a larger regular wave which triggered resistance at 2092.75. Considering the up impulse on 480, if the market sustains the move past this level and starts an impulse also on the 288min cycle, then we would have to acknowledge that the bounce would have further to run. However, the resistance on 288 might still hold, despite of it having been spiked briefly, so keeping an eye on that level in the next few trading sessions is important.

288&480min Cycles

288&480min Cycles

Inflection Points Expected This Week – As Market Operates In Its BEAR MARKET CYCLES

This weekend we will present a host of unique charts and a detailed discussion of market structure projection, which had a software issue related to the end of November timing for a low - which actually due to a rare condition forward translated erroneously skipping the correct mapping for the week so the 16th. We identified this early last week and updated members, as soon as it became clear that future vs. historical MSP was not agreeing. This bug/error has been fixed and will be discussed in a separate post. However, inflection points are expected imminently if not already in.

The cycle study shown in the large chart below (you will need to maximize or zoom into the chart to see the details) is a robust and proprietary analysis that we use in our proprietary trading systems. The objective of this study is to devine the direction and timing of market movement by backing out its natural oscillations - or waves. As can be seen in the chart below, the red and pale cyan studies at the bottom of this chart show the larger directional move in the markets. They show when a market is trending by magnetizing to the upper and lower bounds. This means the 100 and 0 levels. Persistent travel at these extreme bounds indicates a trending market as well as the direction of the trend. When markets attempt to change course, a period of questioning is required. These market questions show up as volatility or could be called CHOP. We are currently in a pronounced stretch of zero bound attention which usually occurs once a change direction has successfully occurred. These tools defined the change of direction in June and July this year from UP to DOWN and likely into a bear market. They could not have had better timing. The objective of these analyzes is non-latent and simple, we think that this has been accomplished in the chart we publish on this page.

Additionally, there is another condition occurring similarly to 2007. While it is not our objective to show systematic trading as an indicator. The RVS is an old and established trading system that has unique qualities currently potentially acting a bit like a larger-term indictor. RVS trades only with what it feels is the prevailing trend. During the last five years. While it has had many losing individual trade elements. It has scarcely had a losing model position since 2009 and its releases in 2010 and 2012. This means that every position, including all the entries required to build a position on an NET-BASIS, resulted in a profit this makes the system stable and persistent which is why we trust it and have not changed anything about it in years. Due to the characteristic of the system's trading only in what it perceives to be the prevailing market direction it believes most probable...and its ability to trade profitably and consistently through whipsaws that usually accompany changes in direction in the market, this system is now setting up a pattern almost identical to 2007. Within the cycle analysis, we are presently likely in initiating bear markets, similar to 2007. As such, RVS believed we were in a new bear market starting in July and profitably shorted (albeit small) the September and October bounces. The reaction of the markets since then has created the perception that the Bull-Is-Back. This can be seen via the many Elliott wave counts and technical analysis calling for new highs, dramatic or astronomical new highs. We believe that most of this analysis is founded in an emotional basis and lacking reliable or factual data.  This reaction the markets also has so far attempted to convince RVS that longs are the preferred trades. If the expected inflection points play out and the cycle directional trend analysis is accurate, this phase for RVS should become a similar whipsaw as in 2007 and regardless of if markets make new highs (as in 2007)  the system should soon revert to a preferred bias towards short risk.

RVS & Market Cycle Study

RVS & Market Cycle Study

The Eye of the Storm – Smart Money Index Obliterated

We make it a habit to monitor our proprietary mcm Indexes. One of them is the mcm Smart Money Index. Regular readers will note that our previous comments have demonstrated that the Smart Money Index as it is theorized and calculated in popular form is deceptive and mostly useless. We have revised the index to accommodate for functional inaccuracy between the theory and the real world. So, the mcm Smart Money Index shows meaningful data for a real-world situation and condition.

Based on discussions in the mcm lounge I wanted to take a look at the mcm Smart Money Index and mcm Indexes and the message was and is not good. It is unbelievable how stretched things are, not to mention how disturbing. There is absolutely NO performance or VERY NEGATIVE PERFORMANCE.

I think these indexes represent the quality of life, stress and conflict that people are dealing with in their lives. If things are less stressful and more positive or growing, the indexes show harmony and balance towards expansion and conversely when the opposite. If these charts are any guide, people, generally, must be profoundly unhappy as a whole.

I want to restate that productive capacity in the world has been coopted - overwhelmed by the agenda of credit expansion at any costs. Thus, once productive people in China (and all over the world) are driven towards unproductive pursuits (and in which they have no particular aptitude or training) such as trading and chasing IPO's while simultaneously borrowing vast sums on margin. Worse, their activities, are not productive for an economy, innovation or a person from the outset. But, more, the results, in the end, are totally negative - for people, the economy, their families and their friends. This is a disease, and it is spreading everywhere and to many people who do not deserve it or ever thought such a conflict could overwhelm them.

What is happening when you look at these charts is you see various indexes that represent different classes and objectives of traders/market participants. Over the last 1.5 years only ONE of them has been marking money - the low liquidity overnight session. When one looks further out its easy to see that investors in many of these indexes would be currently sporting account balances near the 2009 lows at the very same time that the markets are up 300%. This is a crazy concept and indicative of just how stressed the markets and participants are.

I recommend reading: Drama in the Market Seas - A Revealing Look via the mcm Market Indexes

 July 2nd, 2015 mcm Indexes

July 2nd, 2015 mcm Indexes

Below is the chart from Jun 18th...and markets have had a dramatic deterioration in quite a short time.

June 18th, 2015 mcm Indexes

June 18th, 2015 mcm Indexes

EURO Broken, Breaking and Broke – Greece Plays Its Hand

EURO Broken, Breaking and Broke

EURO Broken, Breaking, and Broke

The ECB thought they could back the Greek Government and leadership into a corner with no other choice than an insipid self-destruction that would have left them, culpable, maligned and threatened by their own nation. Soon to be replaced by a trinket government installed at the whim of a few EURO bureaucrats (or Neo-Nazis - take your pick).

Greece played it about as well as possible. Knowing that the objective of ECB and Germany was to make sure that no other political administration in the crumbling European Union would ever be willing to commit such an act of defiance and humiliation against central planners. They waited till after markets had closed to announce a referendum and to "stick the finger" to the central planners (see ECB & EU Strategy – Political, Not Practical). During the afternoon on Friday, Greece made overtures but just after the close of the markets they gave no wriggle room to a central bank that thought it owned the outcome of the situation.

This era, characterized by the senseless debt pumping by central planning bureaucrats all over the world, has destroyed many lives and is presently in the process of destroying millions more - which will inevitably be the driving force of more complex conflicts between nations. The fact is that, via side deals and convoluted transactions with the US FED, virtually all sovereign central banks operate US FED policy by proxy. Almost all of them are precariously close to losing control of the leverage they have been so desperate to pretend is a catalyst to growth when in fact it is clearly the opposite (see these charts). IMF and BIS have been projecting wild fantasies regarding Greek growth for years. As it appears, these delusions are influenced by blind deference to the concept that something can be created out of nothing by a few bankers with a "control-P" key. Sadly this is not the situation as so clearly shown in IMAGINARY NUMBERS. With so little real capital available and so much leverage, even a little disruption can have grave implications. The next months and weeks will likely reveal more regarding leverage (more accurately deleveraging) implications.

Leverage - Where are we now?

Leverage - Where are we now?

These crises arising all over the world may be a catharsis for people in the end, but it will be one of the most painful paths possible for rejuvenation. From this perspective, Greece knows they are in pain, it can not get much more intense for them. What you can not pay for does not get paid - so, there is somewhat of a limit. BUT IT CAN GET VERY PAINFUL for debt-pushing central-planners. The implications of huge and contagious CDS & derivatives losses, financial instability and challenges that are all pointed at the feet and minds of central planners (as opposed to indebted governments) is likely to be a trend.

If there is one lesson from Greece, it is while the drug is offered - take it. When the drug causes ill health and death, for the history books, make sure its manufacturers and pushers get the blame. 

ECB & EU Strategy – Political Not Practical

EURO Implosion

ECB and EU Strategy Political Not Practical

ECB and EU along with many politically interventionist central bank efforts have created a drawn out, conflicted and confusing environment. On one hand financing is readily available for an utterly defaulted nation that never quite made it into the EURO (Ukraine) - yet Greece is being an especially tortured soul. How can this ECB's/EU's conflicted strategy be explained?

It is clear that every day lately, a barrage of the most ominous and negative press grabbing sound bytes are projected by IMF, ECB, EU, etc. Occasionally with rhetoric from Greece and the obligatory 1 out of 10 positive test bubbles. What are the goals of this kind of unending, torturous behavior? Certainly, concern for Greek citizens can not be being improved with this gamesmanship. What kind of negotiation is this?

A POLITICAL BATTLE IN A LEVERAGE WAR

The reality of conditions is that ECB and most central banks have pushed the envelope to the extreme. They are in danger of losing control. It is likely that they have already lost control based on the impacts of their grossly irresponsible gambling and policy activity. A Greek exit for ECB is NOT an option. Yet hyperbole from Eurocrats seeks to project that it's just another day of doing business - nothing to worry about here. However, nothing could be further from the truth. The real fear that ECB and EU has is the potential that it appear qualitatively viable for any nation to pursue a similar negotiation as Greece. Behind the veneer, who knows what kind of deals ECB/EU is making or may need to be made. However, publicly ECB/EU and central banks need to project an image of balance and control.

They have a lot of power and do have the potential for a lot of control. This was on full display in the UK recently when just about any EU dissenter was served a knockout blow in the election process. Scarcely ONE of them got reelected. How convenient for the ECB and EU just as the UK was gaining momentum in its independence movement. If there ever were a clearer message to a politician - it could not be much louder than the one sent to the UK by ECB and EU with their successful and dramatic meddling in the UK political process.

Greece is a vastly different story,. What they have in common though is "leverage": both in the UK and Greece leverage is much too high, and both can not possibly pay their debts. So, what is all this grandstanding for between ECB/EU and Greece? Political intervention. With the central banks losing control of the debt situation and more importantly the ever growing public awareness of what interminable debt servitude looks like, the EU and ECB should an "A" for demonstrating a new and innovative forms of control, manipulation and subterfuge.

The root of the problem at this time is the large amount of insolvency in the system. It is no question, that every politician in Europe and even some in the US are watching with great interest for when they can clamor onto the stage and beg for their own refinancing, bailout or funding.

The labored, conflicted, and irrational hyperbole from ECB and EU makes sense in that it is conveying a very clear message. "When negotiations are complete in Greece, there will be career ending, political and physical risks for politicians." If there is one area that any politician wishes NOT to occur, its reelection, financial, legal, impeachment or physical risk to themselves. Additionally, politicians generally would like fruits for their labor to be rewarded and spendable - both real and political capital.

Danger, potentially criminal or life-threatening, from constituents, is not fodder for a long political career, reelection or spending of real and political credits. So, what we are seeing here are the desperate attempts of the ECB and EU to both agree to anything required to get the Greek situation to disappear behind the curtain. While ending the political careers (not to mention other significant risks) of anyone stupid enough to cause trouble for their debt expansion agenda and marketing campaign.

From this vantage point, this strategy is showing some progress and is quite imaginative. The key to a signal of an end to Greek negotiations is the implosion of political careers of the "deviant operatives" in power and at the negotiating table in Greece currently. One could not send a better message than the ECB and EU events in UK and Greece can be conveying to Italy, France, Hungary,  Spain, Slovakia, Romania, Slovenia, Latvia, Ireland, Czech Republic, Estonia, Belgium, Croatia, Austria or Bulgaria politicians. While there is not even a shred of practical or sensible in this process - political it clearly is.

Will this kind of tactic be able to supersede or merely suppress temporarily the dramatic consequences of a destructive credit expansion while these eurocrats and central bankers search for the ever elusive "PLAN B"?

IMAGINARY NUMBERS – Part 1: the Deceptive Nature of Centrally Planned Economic Reporting

[dropcap]O[/dropcap]ver the last years, our efforts have been more and more focused on statistical, data and fact based modeling. During these efforts, we have witnessed truly remarkable events in the world of Central Banking and finance. We have also found troubling market evidence and data that have made it clear, that all may not be what it seems - for a long time. A very long time.

We will add some reference links to this article if anyone is interested or finds it necessary to understand further elements that will only topically discuss today. However, we will assume your familiarity and basic understanding of the methods of Central Banking and Monetary Policy. Understanding it is both simple and complex - and specifically designed to be that way.

The FED Monster

BACKGROUND

The creation of money is implemented via the creation of new credit for almost all of the quantity of money in existence. The remaining very small amount of money is created by printing or manufacture of physical cash. The dollars in your pocket for instance. With the creation of all this money, one would think that the Central Banks and the Treasury would be the major manufacturers. However, the reality is that most new money is created directly by Banks under the supposed auspices of the Central Banking system.

Whichever way one looks at the above scheme, it is clear that any scheme would be fraught with risk in which private individuals were not only enabled but encouraged, banking license in hand, to lend money into existence as fast and in as great of quantities as possible. Further rewarding said individuals with benefits such as shares and large bonuses for executing a primarily non-accretive activity, is conflicted and dangerous.

The reason for touching on this subject is that the FED, which operates as the Central Bank of the World, and its subordinate Central Banks and Institutions, primarily IMF, WBG, BIS, BOJ, BOE, ECB and SNB, have a keen awareness that charging interest on a quantity of money that is constantly growing and never available in great enough quantity to repay the interest on the credit that created it, is not plausible - even with accounting and reporting slight-of-hand. Therefore, these institutions have been constantly looking for new debt servitude candidates and for new ways to create money and amplify money without amplifying debt obligations. Better said, ways to increase the quantity money at a faster rate than the quantity of debt.

These expansionist policies went into overdrive in the late 90's heading into Y2K. I distinctly recall the outright panic that the FED tried to convey at every possible opportunity regarding the two digits 99, as in 1999, flipping to 00, as in 2000. It was overt, misleading and disturbing. Mr. Greenspan was in fact openly discussing the risk of Y2K not only on the financial system but the nuclear defense system and global war machine with obvious implications for a WWIII type scenario. Since when does that not qualify as fear mongering as an agenda?

Wall Street Banks were granted huge tax breaks and special arrangements to prepare for the coming of God -  Y2K. There were quite a lot of religious extremists at the time whose belief was that Y2K would herald the end of the world and the coming of God. They got no breaks or accommodations for their equally zealous expressions of belief. Sadly, they were far less dangerous than Mr. Greenspan who had similar compunction - masked in Fedspeak...not to mention his disciple "Blogger Ben" lurking in the wings.

While working as a consultant/developer at several of the largest US banks in derivatives, structured products, and fixed income at the time, anything and everything that could be dumped into the Y2K budget was. There were several large advantages to this. One being that large firms could reduce their reported expenses and show tremendous productivity gains at the very same time as expanding their technology R&D expenditures and investments simply by putting any expense they could find into a different box for reporting and amortization. This had huge tax implications since special considerations and incentives were also made to support Y2K via various accommodations including  tax. Earnings, productivity, and profits all the way into 2000, could, therefore, be goosed by a slush fund that essentially disappeared real expenses out of existence and magically into profits.

Wall Street, with all this free cash, FED encouragement and ever declining interest rates was looking for any way to seed its imaginary and cheap money in ever aggressive manners to the world - fueling the dot.com bubble and supported by the constant delusionary recursive productivity claims from Mr. Greenspan. I believe this was the other era when the words "virtuous cycle" were used by major central banks. The end of this scheme climaxed with offers of mortgages on stock holdings regardless of whether investments be in Yahoo or Pets.com or IBM. These products required no liquidations to raise cash for down payment, no sales of securities ever to pay the mortgage off. Your mortgage could be paid off by asset appreciation of one's investment account. No Tax obligations due to asset sales. Most importantly, how much more one could spend on a home now that they can get this fantastic mortgage and keep your stock portfolio while ending up getting the house for free. A total dream! Thank goodness these mortgages did not become as popular as the subprime variety. Nonetheless, the Fed presided over these products and approved their origination. The FED, to great effect, encouraged most of the irresponsible gambling. The ultimate goal? Asset price appreciation and capitalization (money amplification) that increases at a greater quantity than debt expansion.

Money amplification was on fill tilt via many new and exotic products and derivatives. These products, as with the Y2K policy regarding the financial system were designed under the specific encouraging oversight of the FED. In many cases, at the behest of the FED. This is no small matter as the FED was already scared at the time that it was running out of ways to expand credit and money fast enough. Additionally, they were even more concerned about the creation of enough quantity of cash to service credit obligations. This is what one sees currently on full tilt in China. A crashing real estate market where debts are unserviceable and central planning looks for any way to put sufficient cash in the hands of debtors to theoretically honor their obligations.

After attempting to UN-JAPAN itself from Y2K, the FED reversed its aggressive credit expansionary agenda of the late 90's, once, without calamity, nuclear war or financial meltdown, Y2K had come and gone and they had little cover for such extensive accommodation. The results were obvious to effect. Credit fueled speculation and investing by internet technology firms, sovereigns, and large multinational firms met a tighter and tighter market and was unable to rollover obligations. How many times do we have to play this illogical game? Pressure on the markets was substantial, and a bear market ensued into October 2002. Under the cover of September 11 terrorist attacks, Mr. Greenspan, now had a popular and patriotic excuse for financial modernization unlike we have ever seen in history and began an aggressive search for stratospheric credit expansion via an unending cycle of low rates and regulatory underreach, policy drift and leverage accommodation. This obviously created a new speculation not only in the real-estate markets but much more substantially in the OTC derivatives and debt markets.

CRASH BANG BOOM AGAIN

What would have been obvious to any  sensible and practical thinker would be that result of overleveraging will always end the same. Only Central Bankers appear to think that constant asset price appreciation, 2% inflation targets, debt expansion and currency debasement are components of practical policy.

The practicality of this kind of planning and care of our society, especially the most junior and senior members of it, is certainly highly questionable and irresponsible. It would be obvious to nearly any sentient human that a deleveraging of epic proportions must be in order when firms who were levered 40 to 1 were still not making enough money and so decided that levering  80 to 1, and in many cases much more, was reasonable and appropriate.

No need to discuss the chaotic deleveraging of 2007 to 2009...save with respect to the fact that the obvious answer via planning and policy has been to solve that problem with the same solution 100X. So, take conditions that could not be pushed to further extreme in 2006 and 2007 without central bank directly buying the CDO's, CMO's, CDS's and debt notes of the era to MUCH more significant extreme by doing the only thing they did not do in 2006 and 2007....become the market.

IMAGINARY NUMBERS

Obviously, the FED, during the 2008 to 2009 period got quite used to holding highly risky securities on its books. With the creation of "mark to whatever and whenever you want accounting" it believes it is not obligated to ever show a loss. So, the risks of holding securities, no matter how insolvent or valueless is perceived by the FED as "low". This is so as long as they can maintain confidence in the currency. Recall that the FED bought all the assets from Bear Sterns that JPM did not want. These included several Hotel chains that subsequently ended up insolvent to the tune of something like $20 billion of FED held assets in addition to many other horrid debts that when examined on Maiden Lane Holding's books - miraculously show persistent profits. We are now in the thick of the reason for this article. Imaginary Numbers.

Currently, the FED sits at 1% reserves. This would be the same thing as a normal investor owning $1,000,000 with collateral of only $10,000. The bank has publically stated that it would be of little consequence to them if they were to move to -1% or -2% equity because "...they hold till maturity". To put this in perspective, as a trader with an account at Interactive Brokers, if your account were $250,000, what the FED is saying, is that as long as you wish to "hold to maturity", your account can go to -$500,000 without any consequence.

Any thinking by those who are responsible for the sanctity of our currency and debt system that shows egregious speculation and fudging of numbers of any type should be a call to alarm. Sadly, if the inanity of aforementioned FED comments were all that was to worry about with regard to imaginary numbers and deceptive policies - this would be bad enough, but possibly manageable. However, the reason for the BACKGROUND section of this article is to present that the FED and other central banks have been attempting for long periods of time to create and implement new methods of printing money that do not involve direct transmission of new interest payment obligations. These policies and interventionist approaches become increasingly risky as their reserve ratio decreases. Especially beyond negative 2%. FED tactics should inspire nothing but doubt at this point as their risk levels are much greater than they are publically admitting.

Via our analysis and data, it has become clear via our indexes and statistical analyses like the GAP index, that especially after the 1987 crash an extremely large entity began an agenda of directly seeding money into large risk and debt markets at low liquidity time periods and without regard for loss. To give this some color, let's take a look at the current margin debt markets. Currently, margin debt sits at a record of over $450 billion. How much asset appreciation and market capitalization does $450 billion margin debt buy you? Well, let's look at some more of our data. Last year roughly $650 billion of incoming cash was used to purchase all US stocks. Analysis of only the S&P500, this resulted in the creation of $2.4 Trillion of new theoretically spendable money with say only roughly $50 billion of increase of margin debt. Our calculations are for cash into ALL US stocks, therefore, the amount of total asset appreciation, when applied to all US stocks rather than specifically the S&P500 is estimated to be more like in the $4 trillion area rather than $2.4 trillion. That is quite a substantial amount of money amplification.

To the FED way of thinking this is a veritable panacea. Imagine what printing $85 billion a month can do if only $650 billion creates $2.4 trillion in new equity in only the S&P500. Just put into perspective how much new money/equity that $450 billion of margin can create. Money amplification at its finest.

2014 & 2015 Equity Cash Flow

2014 & 2015 Equity Cash Flow

YearS&P500 Market CapS&P500 Asset Appreciation
Centrally Planned Money Amplification
Jan 2014$17,186,722,100,000N/A
Jan 2015 $19,557,305,460,000$2,371,000,000,000
Current$19,754,854,000,000$197,549,000,000

So, as we can see, it could be quite effective policy for the FED to play fast and loose with policies, numbers, and reports. The sad fact is that this has most likely been the case for a long time and as such we have not had truly free markets for a much longer time than the last few years. Our market structure algorithms have located this constant drip of capital into assets. Markets that the central banks have no authority over. However, their activity has been like a metronome ensuring that prices travel on a long-term inexorable rise and that they go mostly unnoticed. Via, which accounts these holdings are transacted, would be of significant interest. Having worked on the Fixed Income Desk at one of the largest primary dealers and analyzing, valuing transactions on lots of accounts including unmarked, secret FED accounts inspires little confidence in FED benevolence but rather does so for its unending self-serving appetite and lack of transparency.

MORE & MORE IMAGINARY NUMBERS - THE GREAT GDP DECEPTION

Let's look at a some more evidence. We did a detailed study of the GDP and CPI reports and found highly disturbing discrepancies that, of course, are promptly ignored by the largest media and financial institutions. There are several discretionary and arbitrary key components to the GDP, CPI and PPI calculations that offer a rather startling basis for any statistician:

  • Seasonal Adjustments
  • Hedonic Adjustments
  • Imputed Contributions

Seasonal Adjustments revolve around ever changing accommodations for tendencies of economic contributors to vary due to cyclical oscillation. However, there is simply very few quantifiable cyclical basis' that seem to be consistently applied by the FED or reporting bureaus. Rather, seasonal adjustments seem to reflect the discretion of some bureaucrat or entity seeking to goal seek values.

Hedonic Adjustments are quality adjustments that attempt to adjust for inequality of product over time. These calculations are utterly useless and 100% discretionary arbitrary. At best Hedonic Adjusted data should be viewed as a secondary reporting index, not a primary index. We will examine this a bit more detail below as they are used to great effect.

Imputations are non-economic contributors that are deemed to reflect economic transactional contribution. These too are convenient, arbitrary and highly discretionary and are used to great effect. They are statistically deceptive and mostly entirely irrelevant.

What does this have to do with the FED? And to do with Imaginary Numbers?

First and foremost, in a supposed nonsupervisory role - the FED accepts the above data without complaint or conflict. That alone is more than interesting. Methodologies for such data should be very closely scrutinized not accepted. We are of the opinion that the FED and central banking accept these numbers because they supervise their manufacture. These are the key numbers for vast campaigns to co-opt real capital and money into alternates. In any such long-term agenda, several layers would be required to execute:

The FED:

  • MUST be allowed to supervise and administer (goal seek) most official government economic reporting.
  • MUST exercise more and more interventions and press conferences to expand manipulative tentacles in various markets with direct capital support.
  • MUST attempt to combine data in such a way as to represent a cohesive argument that seems somewhat believable.

On the practical side, it is impossible for the many economic reports that are published to be managed in a cohesive manner without tacit control and supervision. It is simply impossible for the FED to accept methodologies that would not meet its standards or agenda. Therefore, from this perspective, the FED is the only logical supervisor. The two most important numbers the FED needs to convince the world and public are real and plausible are GDP and Inflation. Both areas are reported with such lack of discipline and goal seeking that the published numbers are utterly useless.

Take the GDP calculations and reporting reflected below. This chart shows what is a nearly perfect parabola. There is simply no way to create such a perfect series of numbers in nature out of something so complex as the millions of US economic elements, businesses, and people. This is GOAL SEEK and CURVE FITTING at it highest extreme. There is simply a less than 15% believability in these numbers based on the basic understanding on how statistics works. On a simple level? Does your bank account look like this? Even if one is a member of the .001% it is highly unlikely that one's accounts look like this or even 30% like this. Normal series will show MUCH more volatility and noise even if the end points end up being the same - just like Warren Buffet's bank account surely does.

If these numbers were correct in any fashion, US corporations and citizens would be feeling rather different at this time. Just compare, the price of Oil to reported GDP...there is simply no explanation for this disconnect from official sources. Just shut up and believe the numbers, please.

GDP 2015 as reflected in FRED database

GDP 2015 as reflected in FRED database

FRED GDP Comparison

FRED GDP Comparison

A CLOSER LOOK AT GDP

Hedonic Adjustments

The term “hedonics” is derived from ancient Greek and basically means “pleasure doctrine”. Certainly apt and intriguing.

An iPhone last year cost $700 and an iPhone this year cost $700. However, in the current GDP reporting, these numbers are calculated to incorporate qualitative and subjective;y adjusted contributions to GDP. So, theoretically, if the screen, camera and memory of the iPhone improved. These improvements are estimated for dollar value and contribute to GDP in excess of the $700 transaction for the iPhone. So, i can randomly put a $500 value on the improvements to these elements. BAMM - now iPhones of the same type all contribute $1,200 to GDP.  If the addition of new tools and features such as the fingerprint sensor occur, then those are quantified and added to GDP. BAMM BAMM - now a $700 iPhone transaction is worth $1,500 to GDP.

CPI

The funny thing about goal seeking is how insidious it is. In the above process for the iPhone contribution to GDP, the adjustments that increased GDP are used to discount CPI. This artificially suppresses what is more like an annual 11% inflation rate into something like a 2 or 3% percent inflation rate. Theoretically, an iPhone sells for $700 this year and the equivalent model sold for $700 last year. Hedonics allows the adjustment of the iPhone inflation rate by the additional features and improvements purchasers are not paying for. So $700 - $300 for a better screen, camera, and memory. BAMM now the inflation rate on iPhone is -40%. throw in new features and its down to a number in the CPI of 60% lower than the previous year if we so desire.

This contradiction has obvious benefits. It misrepresents true inflation for the whole economy and average person and GDP. This makes the GDP number look better and more efficient. Additionally, it gooses GDP on top of that with the actual hedonically contributed cash values added to real transactions.

As a statistical analyst, I must say this is incompetent data collection and analysis at best.

Imputations

Imputations are totally imaginary. If you have paid off your house or receive free offers in the mail, coupons from the grocery store, free bank fees or back to the iPhone, certain intellectual property was developed during the year for the iPhone (say some software innovation or R&D project) that does not result in a direct transaction, these elements can all be arbitrarily be estimated and then contributed to GDP. In the case that you own your home outright, imputed GDP contributions are the result of calculating the value of your home and what you would be paying in rent and then recording those imaginary rent payments as positive contributions to GDP.

Needless to say, the obvious nefarious capability of these elements is huge.

WOULDN'T YOU KNOW IT?

Since 2009 wouldn't you know it that the primary growth of GDP has occurred not in the advertised headline numbers but similar to the character of just about everything out of official sources these days, in the arbitrary values. This is not unlike the artificial liquidity available to corporations to buy stock, increasing the "E" in EPS but not increasing the "S" in gross or net sales. A mirage that it seems is only too happy to be propagated. SO, in 2009 there were roughly the same amount of Americans working as there are now, only the population has increased by 30 million since then. In 2009, GDP was reported at roughly $14.5 trillion. Currently, the reporting proposes a number of $17.5 trillion. HOWEVER, in 2009 GDP minus imputations and hedonics was $9.5 Trillion. Today when you subtract out hedonics and imputations you get $10.5 trillion. Is that not curious?

In 6 years the US GDP grew by a real $1 trillion NOT $3 trillion.

This would imply a growth rate of imputed contributions of 17.5% a year in an economy unable to deliver much more than a reliable 1.75% growth during that time. As for Hedonic contributions, they are hitting at a growth rate of 20% annually. However you cut it, this is in our opinion engineered, goal-seeked data that is meaningless with regard to the true economy, but very good for the US Debt to GDP ratio...and, therefore, credit worthiness. It is also, convenient for FED policy. The only rational explanation for the constant error and risk distribution always being pushed into the column that benefits the FED agenda is the FED. At best, this pattern can be attributed to incompetence...which on its face is even scarier than the alternative that is knowingly misrepresented and manipulated data as a part of an agenda.

GDP Analysis with Hedonics and Imputations Broken Out
GDP YearCash GDP No
Discretionary Arbitrary Adjustments
Officially
Reported GDP

(Billions)
Total Guessed 
& Non-financial
Contributions to GDP
Imputed GDP Values & Non-financial transacted GDP Assumptions (In Billions)Estimated
Imputation
Percentage of GDP
Imputation
Increase
(in Billions)
Hedonic
Adjustments
Increase
(in Billions)
Hedonic
Adjustment
Percent of GDP
2007$9,892$14,441$4,550$2,22515.41%$133.5$2,32516.10%
2008$9,585$14,547$4,962$2,35816.21%$141.5$2,60417.90%
2009$9,355$14,564$5,209$2,50017.16%$150.0$2,70918.60%
2010$9,734$15,232$5,498$2,65017.40%$159.0$2,84818.70%
2011$9,894$15,819$5,925$2,80917.76%$168.5$3,11619.70%
2012$10,142$16,420$6,278$2,97718.13%$178.6$3,30020.10%
2013$10,239$16,891$6,652$3,15618.68%$189.4$3,49620.70%
2014$10,376$17,200$6,824$3,34519.45%$200.7$3,47820.22%

DYNAMITE IN A CAN

The FED promotes confidence as does its recently created outpost the ECB and the previous central bank that the FED is 100% responsible for creating and supervising - the BOJ. However, these institutions can promote their agenda so long as their reserve ratios are close to positive. When they start dropping below 3%, then the likelihood of loss of confidence becomes VERY VERY high, and this is NOT a situation the central banks can control. People will want to see the central banks fund reserves - the options at this time will be limited to them and most likely met with hyperbole: "Trust us we know what we are doing, we expect a strong resumption of strength next year" type commentary.

The other reasons that we are posting this article now is that things can happen in an unscripted order and given our article from May 24th: Drama in the Market Seas – a revealing look via the MCM Market Indexes, the primary activity driving market prices may be quickly put under severe distress.

Moreover, given the horrific and obvious manipulation of CPI, PPI and GDP - are these signs of an ethically compromised, panicked and fractured institution showing up just when we may need the opposite?

LEARNING & SOME GOOD WATCHING

Money for Nothing (Five Stars)
Markets and governments around the world hold their breath in anticipation of the Fed Chairman's every word. Yet the average person knows very little about the most powerful - and least understood - financial institution on earth. Narrated by Liev Schreiber, Money For Nothing is the first film to take viewers inside the Fed and reveal the impact of Fed policies - past, present, and future - on our lives. Join current and former Fed officials as they debate the critics, and each other, about the decisions that helped lead the global financial system to the brink of collapse in 2008. And why we might be headed there again

Below is a link to a whole Money for Nothing documentary. However, if the link is pulled down - the movie is HIGHLY recommended worth buying from the director or other online source.

97% Owned (Five Stars)
97% owned present serious research and verifiable evidence on our economic and financial system. This is the first documentary to tackle this issue from a UK-perspective and explains the inner workings of Central Banks and the Money creation process. When money drives almost all activity on the planet, it's essential that we understand it. Yet simple questions often get overlooked, questions like; where does money come from? Who creates it? Who decides how it gets used? And what does this mean for the millions of ordinary people who suffer when the monetary, and financial system, breaks down? A film by Michael Oswald, Produced by Mike Horwath, featuring Ben Dyson of Positive Money, Josh Ryan-Collins of The New Economics Foundation, Ann Pettifor, the "HBOS Whistleblower" Paul Moore, Simon Dixon of Bank to the Future and Nick Dearden from the Jubliee Debt Campaign.

Princes of the Yen: Central Bank Truth Documentary  (Five Stars)
“Princes of the Yen: Central Banks and the Transformation of the Economy” reveals how Japanese society was transformed to suit the agenda and desire of powerful interest groups, and how citizens were kept entirely in the dark about this.

Richard Werner on banking and how banks create money (Four Stars)
Interesting Lecture by Richard Werner regarding what is WRONG with out financial system

Drama in the Market Seas – a revealing look via the MCM Market Indexes

[dropcap]T[/dropcap]his article goes into detail regarding some diagnostics of the market that are not easily or often seen and most importantly are most often inaccurate as publicly they are presented. We go into some considerable detail to see what is happening under the hood of the market. The surprising discovery is that most investors are most likely not doing very well.

Drama on the Market Seas

Drama on the Market Seas

MCM DAY INDEX & MCM CLOSE INDEX

For the day trader - the day session performance has been under-performing for a very long time over all. However, if one were trading the opening and/or the close session - for the last 6 months performance has been especially challenging. Despite all the headlines regarding new highs in the markets every other day:

The most surprising discovery is that most investors are most likely not doing very well. For the day trader,  market day session performance has been under-performing market direction substantially for a very long time. However, if one were trading the opening and/or the close session, for the last 6 months performance has been especially challenging.

To summarize, despite all the headlines regarding new highs in the markets every other day:

  • For the closing session long traders, the market is an absolute disaster and likely would lead to egregious losses taking account balances back very near 2009 levels.
  • For opening session long traders, the market is not quite a horrible with account balances presently approaching Oct 2008 levels.
MCM Indexes and MCM Smart Money Indexes

MCM Indexes and MCM Smart Money Indexes

MCM GAP INDEX

There is one area of performance that has been remarkably good.

Much better than at any point in history that we have examined.

 From what it seems - quite probably "too good".

Evidence of central bank cooperation and intervention abound. We have discovered quite a few Central Bank driven "market structures" that have been very strong. Interestingly, it appears that central bank money printing and money amplification efforts via asset interventions and appreciation have been in place for a very, very long time. These market structures go back in history to the 70's and 80's. What seems clear, market crashes notwithstanding, is that central banks are operating and have been operating to increase and amplify the quantity of money via asset markets for a significant duration. Regardless, however, the levels central bank participation of the last years have been unprecedented. , there we have it, the best performance in the markets has been in the areas where the central banks get the most "bang for the buck". The thinly traded and easily influenced overnight session.

Result: The best and pretty much only performance in the markets since 2009 has been in the areas where the central banks get the most "bang for the buck". The thinly traded and easily influenced overnight session.

Currently, from a cursory appearance, there seems to be somewhat of a panic going on. hThe GAP INDEX is now dramatically outperforming prices...while at the same time market are dramatically underperforming during the high liquidity sessions. The question that comes to mind is:

"What happens if the overnight session levitation and performance starts to fail?"

This question can be answered in context: If it were not for the overnight session performance over the last nine months, the markets would be in an all out bear market and most probably crash.

SMART MONEY INDEX

The SMART MONEY INDEX is often touted and bandied about on the internet and TV. However, rarely can a more unviable and distorted index - being highly aberrantly calculated and on its face flawed - be so mispresented.

For this reason, we calculate a reasonable, viable and thorough version of the concept that uses sophisticated synthetics for the dramatic consequences of the ultra slow open of the S&P500 and highly distorted opening prices. As with our GAP index, we use a combination of futures and other ETF 's to synthesize the cash opening prices. This leads to a very high accuracy using our methods of calculation as opposed to the what we normally see published. For the record, it is our opinion that is usually best to ignore any general reference to the SMART MONEY INDEX. Though the SMART MONEY INDEX concept sounds nice - sexy even, as it is calculated it is statistically distorted to the point of being useless.

Using a reliable methodology, however, valuable data can be gleaned from the SMART MONEY INDEX concept. We call our version that the MCM SMART MONEY INDEX. What this tool shows in the included chart in the article via the green line - is a collapse in the "SMART MONEY" investor commitment.

Keep in mind that with overnight Central Bank activity at record highs, the impact of a dramatic fall off in institutional participation may have different impacts than expected. However, it seems that the case for a sudden collapse in the markets due to the absence of professional money may be increasing.

 

 

 

The 2015 January Effect: Status – On Track

[dropcap]E[/dropcap]arly 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.

MCM January Effect Analysis

Projections – a View Back & Forward

[dropcap]P[/dropcap]erspective is sometimes quite useful. As a last post in this series discussion the Daily and Weekly market structure projection toolkit, we thought a look at the historical projection compared to actuals and combined with a longer-term forward view might be enlightening in some way for context and an overview of this unique work.

Please keep in mind what this tool is NOT:

  • not attempting to project market scale or symmetry.
  • not attempting to project a trend.
  • not a neural networks guessing system
  • not based on anything indicators/lagging calculations - only detailed historical trade data and geometrics

However, the objective IS to project structural Directional Change over the analysis period on a week by week, day by day basis. Any view to stringing a bunch of projection elements together is distorting their value. A new high projection is not meaningful. Neither is a new Low projection. However, the fact that the market structure is pointing upwards or downwards for the analysis periodicity is the objective and of value.

Market Structure Projection - A Historical and Longer-term View Forward

Market Structure Projection - A Historical and Longer-term View Forward

 

 

Reference Post Regarding Historical Market Structure Projection

[dropcap]R[/dropcap]egarding the previous post showing the current market structure projections, this is the first time that we have posted these charts on the new mcm site. Given that, there may be some unfamiliarity with these tools. This does not, of course, exist within the current community - which is very familiar with them over quite a long period. We thought that it would be of value to show a chart of the past projections and how our market structure algorithms tracked.

For this reason, below is an actual chart reflecting from April 1 that users referenced in real-time. None of the data on he projection lines changed from the future projection to the time they became historical - meaning as the future became the present. Keep in mind that though these methods have tracked well for a long time there is no necessity that they will continue to do so now. There is no reason for them to change their drift substantially, as we have found that markets are highly predictable and repeatable though the sizes of movements, distentions and reactions may not be.

Daily/Weekly Market Structure projections as of April 2015

Daily/Weekly Market Structure projections as of April 2015