What is this symmetrical triangle in the $INDU-$FTSE ratio warning us of?

Comment

Comment by Mark Lytle on February 24, 2010 at 2:09pm

Comment by Mark Lytle on February 24, 2010 at 1:51pm

I am not saying America's default is immanent....I think it will happen after Britain's, although not 'years' after Britain's....It probably relates to how many smaller fish have to go belly up first...
As to the Deflation/Inflation argument, I see deflation is happening now in most assets, in most places. The dollar is getting support from investors overseas, fleeing what are perceived to be riskier assets...as long as that process continues, the American economy will be saved from default. It will probably be possible at some time in the future to spot some pattern, whether it is CDS values or comparative equities charts or currency charts, that will time America's denouement. When that event occurs we will go into a mixed Deflation/Hyperinflationary period. How is that possible? Because most currencies in the West will have been discredited by that point, they will not function much outside of their borders. We will see a repeat of the collapse of the Baltic Dry Index as world trade again, virtually ceases...Within country's borders, pre-existing currencies will still be used in most cases, although bartering and various underground economics will become more important. It's questionable in my mind whether official devaluation of wrecked currencies will do any good, as it's the policies of the states carrying the currencies that will be the thing being refuted. We are talking about a collapse of trust, and it will take a long time to build that back.
My bearish outlook comes from the confluence of two time nodes back around December 28th and early January. This has not been proven wrong yet, although anything's possible. It has nothing to do with the approaching default of the West.

Comment by Steven Vincent on February 24, 2010 at 1:34pm

I think the thing to keep in mind is that it is possible to see a crisis coming from a great distance away and be right that eventually it will arrive but be very wrong about the timing of its arrival. Bearish economists and traders have had this problem consistently. There were many who saw the bursting of the housing/derivatives bubble coming back in 2003-2004 and were very wrong on the timing. Also read Livermore...he comments how he could see a bear market coming and then would get wiped out because he was early over and over again.

There is only two ways the debt bubble to be resolved: bursting in a deflationary wave and MASSIVE GROWTH. Both are possible. The former appears more likely at the moment. But we need to stay focused on the technical signals and not on our opinions...market action has a way of disproving (painfully) our biases.

Comment by Mark Lytle on February 24, 2010 at 12:06pm

Also this:

http://www.marketoracle.co.uk/Article15931.html

and my favorite link:

http://www.thedailycrux.com/content/3455/Porter_Stansberry

with this excerpt:

When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists - Alan Greenspan and Pablo Guidotti - published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default.

Comment by Mark Lytle on February 24, 2010 at 11:54am

Yes, there will be people who will write articles saying that the U.S. is immune from default. That is, of course, false. We won't 'catch' anything from Southern Europe, I would agree, but we will default based on our own collapsing fundamentals.

Check out these links:

http://www.zerohedge.com/article/coming-america-greek-sovereign-deb...

http://www.gainspainscapital.com/index.php?option=com_content&v...

http://www.financialsense.com/fsu/editorials/laird/2009/1229.html

Comment by Steven Vincent on February 24, 2010 at 11:24am

Just ran across this on Bloomberg. Seems to be relevant to the discussion:

Swaps Show European Contagion Won’t Reach U.S.: Credit Markets
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJ.l3SDKb2F...

Comment by Mark Lytle on February 23, 2010 at 10:47pm

Steven, your analysis of the currency side, is bringing up the interesting point, that people going short in various European markets and ultimately down the road, even Britain's (and ours),could possibly lose almost as much in currency loses as they gain from their short positions. It makes one wonder if precious metals aren't the way to go after all....it might be simpler...

Comment by Steven Vincent on February 23, 2010 at 9:51pm

To add to what you are saying, the currencies of the countries in question are certainly telling us something about what the markets feel about their relative sovereign debt risk. The Euro has been plunging radically against the dollar, so the market thinks that risk is much higher in the Eurozone and that US dollar and US debt represents relative safety. The GBP.USD recently broke a key technical level as well so clearly the market has a similar opinion of Britain vs. the US. I do think that the dollar is set to sell off to support and the Euro and GBP will rally, but after that they will both be good short sales.

Note that the GBP has also experienced a bearish 50/200 EMA cross. The Swiss Franc is set to do the same any day now.

Comment by Mark Lytle on February 23, 2010 at 8:05pm

I would add this post is not just about the first chart I provided...it is about all of them. It's useful for the readers of this post to do a few plots of the markets of weak nations against the U.S. to get the feel for what I'm talking about, and compare with the increasing CDS rates for these troubled countries. It's not just about a triangle on one chart....

Comment by Mark Lytle on February 23, 2010 at 7:50pm

My hypothesis is that Britain goes into default first, consistent with the CDS chart I have provided, and then at some later date, the U.S. follows. The triangle _might be_ timing Britain's crisis. It does not suggest when the U.S. enters into the same thing. But Britain should be the warning to the Americans....

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