Graham Summers’ Weekly Market Forecast (5/18/15)

Last week was options expiration week (equities and indexes). This is the week for market gaming as usually two things happen:

1)   The Fed juices the market to provide additional liquidity to Wall Street.

2)   Wall Street uses the additional liquidity to gyrate the markets to make sure as many options positions as possible expire worthless.

Today is Monday, which has become a rally day for stocks. However, there are several large negatives on the horizon.

The first concerns Greece. For three years now we’ve been told that Greece was “fixed.” It was not for the simple reason that you cannot fix a debt problem with more debt. There are only four ways to solve a debt problem:

1)   Default

2)   Restructure (partial default)

3)   Pay it off

4)   Inflation (a default of sorts)

Greece cannot engage in #4 because, as part of the Euro, it cannot print its own currency. This leaves one of the other three. Thus far, the IMF, ECB, and EU Government have managed to avoid facing the music largely because Greek politicians have been willing to sacrifice their economy in order to remain in power.

This appears now to be changing. The current Greek ministers seem far more willing to disagree with the Troika, to the point that there is talk of a Grexit (Greece leaving the Euro) on the other side of the aisle, particularly from Germany.

At the end of the day, it all boils down to money. Greece doesn’t have it. In fact, its latest payment to the IMF was made using funds from the IMF. The country is completely broke and has been raiding social security funds and other Government vehicles just to keep the lights on.

Greek banks have about 3 weeks worth of collateral on hand to remain solvent. And the country as a whole has 14 debt payments worth over €5.5 due within the next 10 weeks. This doesn’t sound like a lot… but for a country that was able to only raise €450 million by raiding its municipalities in April, it’s a gargantuan sum.

The Euro has found support at 1.05. The real issue will be just how much Euro strength ECB President Mario Draghi is willing to stomach before he smashes the currency down again. The lines to watch are below.

The Greek mess has lit a fire under Gold again, which appears to have bottomed in both the Euro (blue) and the Japanese Yen (red). The one exception is Gold priced in US Dollars mainly because the US Dollar has been so strong for much of the last 9 months.

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Good Investing!

Graham Summers

Chief Market Strategist

Phoenix Capital Research

The Fed is Twice As Leveraged As Lehman Was

The 2008 Crisis was caused by too much debt/ leverage, particularly in the form of illiquid derivatives (mortgage backed securities get the most attention, but the derivatives market was well over $800 trillion at the time of the crisis).

To combat the financial crisis, the Fed did three things:

1)   Cut rates to zero.

2)   Abandon accounting standards.

3)   Engage in Quantitative Easing/ QE.

None of these policies represented “solutions” to the crisis. In fact, you couldn’t even accurately argue that they represented “containment.” What the Fed did was permit the very cancerous securities that nearly imploded the Wall Street banks to spread beyond from the private sector onto the public’s balance sheet.

You cannot cure cancer by letting it spread from one area of the body to the next. You cannot solve a termite problem by letting the termites move somewhere else in a house. So how could one argue that you could solve a financial crisis by letting the problems spread elsewhere in the financial system?

Consider mere leverage levels. Going into the 2008 crisis, the investment banks sported leverage levels in the 30-40s. Lehman was leveraged at 31 to 1. Morgan Stanley was leveraged at 30 to 1. Merrill Lynch peaked out in the low 40s.

Today, the Fed’s has $57.6 billion in capital and $4. 4 TRILLION in assets. That represents a leverage level of 75 to 1.

The Fed will argue that this leverage does not matter because it can print money to increase its leverage levels. This is technically true, but doesn’t alter the fact that the Fed has backed itself into a corner by buying up over $3.5 trillion worth of stuff… which the Fed has no idea how to exit.

Indeed, we know that Janet Yellen was “somewhat concerned about exit strategies” back in 2009 when the Fed’s balance sheet was $2 trillion or so. Today it’s more than TWICE that. One wonders just how “concerned” she is today, with the Fed’s balance sheet larger in size than the GDP foremost developed countries.

Even more absurd is the Fed’s ongoing issue with interest rates. Never before in history has the Fed kept rates at zero for 5+ years. But then again, never before has the Fed’s real taskmasters, the TBTFs, been sitting on over $180 trillion in interest rate based derivatives.

Those who shrug off these issues are overlooking the fact that the treasury dept. has ordered survival kits for employees at the TBTFs… while the New York Fed, has been boosting its satellite office in Chicago in preparation for potential market dislocations when the inevitable interest rate hike hits.

Indeed, nothing exposes the fallacies of the Fed’s policies of the last five years like its horror at the prospect of raising rates even a little bit. Rates have been effectively zero for five years. Today, the Fed is so concerned about what even ONE rate hike would do that it is actively preparing for potential systemic risk.

A second round of the great crisis is coming. The Fed didn’t fix 2008.; it simply set the stage for something even worse.

Smart investors are preparing now.

If you’re looking for actionable investment strategies to profit from the coming collapse, we highly recommend you take out a trial subscription to our paid premium investment newsletter Private Wealth Advisory.

Private Wealth Advisory is a WEEKLY investment newsletter that tells you what stocks to buy, and what stocks to avoid to insure you see consistent gains. Our track record is rock solid with recent positions closed out with gains of 26%, 29%, and 37%… all held for six months.

In fact, we just closed two new winners of 20% and 52% last week!!!

And we’ve only closed ONE loser in the last 7 months!

You can try Private Wealth Advisory for 30 days (1 month) for just $0.98 cents

If you don’t like it… just drop us a line and you won’t be charged again. Everything you received during your 30 day trial (the reports, investment ideas, etc.) are yours to keep…

To take out a $0.98 trial subscription to Private Wealth Advisory…

CLICK HERE NOW!

Best Regards
Graham Summers
Phoenix Capital Research

The Global Bond Market Bubble DWARFS the Housing Bubble

The global Central Banks, driven by their Keynesian lunacy, have induced the single largest misallocation of capital in history.

Nowhere is this clearer than in the bond market today.

Do the following sound normal?

1)   Globally 45% of all Government bonds yield less than 1%.

2)   Spanish and Italian bonds are at levels not seen since the Black Plague.

3)   German bunds have NEGATIVE yields as far out as 8 YEARS.

4)   The 10-YR US Treasury yield is at levels not seen since we were in a World War.

True, the world faces issues today… so it’s not odd for bond yields to be lower… but are those issues on par with a disease that wiped out 25%+ of Europe’s population… or the single largest military conflict in history?

The bond market is now over $100 trillion in size. The large banks have used a small portion of this (under 10%) as collateral to generate over $551 trillion in derivatives.

The bubble is so massive, that the Treasury department had survival kits delivered to the large banks around the country in anticipation of a crisis.

The NY Fed, similarly, is increasing the scope of operations in satellite office Chicago branch in preparation of a natural disaster or other eventuality could shut down its market operations as it approaches an interest rate hike…”

And then of course there are the big banks themselves… who lobbied Congress to the put taxpayers on the hook for their (the banks’) future losses on their gargantuan derivatives portfolios.

The simple truth is that the Central Banks bet the financial system on their academic theories… and have found that the system didn’t respond as they hoped. The economic “recovery” is the weakest in 80+ years… and that’s based on data that OVERstates growth.

The Fed’s own research shows that its QE programs only dropped unemployment by 0.13%… spending over $390,000 per new job created between the start of the crisis and the alleged end of the recession.

The ECB hasn’t done any better. It is not actively CHARGING depositors for sitting in cash. Several EU nations are now showing metrics on par with 3rd world countries.

And then there’s the Bank of Japan… which has induced a record high number of Japanese on welfare… and boosted the misery index to a 33 year high (mind you, this period of 33 years includes the collapse of the biggest asset bubble in Japan’s history… and people are MORE miserable NOW).

Another crisis is coming. And judging from the actions of the Fed and others to prepare (survival kits etc) it’s going to be far worse than the 2008 collapse.

Smart investors are preparing now.

If you’re looking for actionable investment strategies to profit from the coming collapse, we highly recommend you take out a trial subscription to our paid premium investment newsletter Private Wealth Advisory.

Private Wealth Advisory is a WEEKLY investment newsletter that tells you what stocks to buy, and what stocks to avoid to insure you see consistent gains. Our track record is rock solid with recent positions closed out with gains of 26%, 29%, and 37%… all held for six months.

In fact, we just closed two new winners of 20% and 52% last week!!!

And we’ve only closed ONE loser in the last 7 months!

You can try Private Wealth Advisory for 30 days (1 month) for just $0.98 cents

If you don’t like it… just drop us a line and you won’t be charged again. Everything you received during your 30 day trial (the reports, investment ideas, etc.) are yours to keep…

To take out a $0.98 trial subscription to Private Wealth Advisory…

CLICK HERE NOW!

Best Regards
Graham Summers
Phoenix Capital Research

The Black Swan Your Broker Won’t Tell You About

The US Dollar as we know it, derives its value based on where it trades against a basket of other currencies. Some 56% of this basket is comprised of Euros. Because of this, moves in the Dollar and the Euro tend to be closely correlated.

So, when the ECB cut interest rates to negative in June 2014, capital began to flow aggressively away from the EU and into the US Dollar. This in turn kicked off a strong US Dollar rally.

Which in turn began to implode the $9 trillion global US Dollar carry trade.

Globally, the world is awash in borrowed money… most of it in US Dollars. The US Dollar carry trade is north of $9 trillion… literally than the economies of Germany and Japan COMBINED.

When you BORROW in US Dollars you are effectively SHORTING the US Dollar. So when the US Dollar rallies… you have to cover your SHORT or you blow up.

Below is a chart showing the inverse US Dollar (meaning that when the Dollar strengthens, the black line falls) and the Euro (blue line). Note that the two move almost lockstep together:

This situation is not over. The US Dollar carry trade did not clean itself out in the space of six months. Again, there are over $9 trillion in borrowed Dollars floating around the financial system. If the US Dollar continues to strengthen at a bare minimum 50% of this will need to be unwound.

If you’re looking for actionable investment strategies to profit from the coming collapse, we highly recommend you take out a trial subscription to our paid premium investment newsletter Private Wealth Advisory.

Private Wealth Advisory is a WEEKLY investment newsletter that tells you what stocks to buy, and what stocks to avoid to insure you see consistent gains. Our track record is rock solid with recent positions closed out with gains of 26%, 29%, and 37%… all held for six months.

In fact, we just closed two new winners of 20% and 52% last week!!!

And we’ve only closed ONE loser in the last 7 months!

You can try Private Wealth Advisory for 30 days (1 month) for just $0.98 cents

If you don’t like it… just drop us a line and you won’t be charged again. Everything you received during your 30 day trial (the reports, investment ideas, etc.) are yours to keep…

To take out a $0.98 trial subscription to Private Wealth Advisory…

CLICK HERE NOW!

Best Regards
Graham Summers
Phoenix Capital Research

The Fed Has Bet the Financial System on Misguided Theories

The Fed has bet the financial system on academic theories, that upon close inspection defy even basic common sense.

One could easily write a multi-volume set of books on the Fed’s mistakes. However, in its simplest rending, the biggest flaw in the Fed’s models pertains to its total lack of understanding of human behavior.

The Fed believes that if interest rates are low, investors will seek out higher returns by piling into stocks or even real estate. As these asset prices rose, the investors would feel wealthier and so go out and spend more money… which in turn would drive the economy towards growth (70% of US GDP stems from consumer spending).

Of course, the Fed’s model is far more complicated than this, involving all kinds of “clever” math equations… but ultimately the Fed’s recipe for growth is “cut rates and if necessary, buy bonds with newly printed money and growth will appear.”

The only problem with this all of this is that people buy things with income not based on where their stock portfolio is trading (assuming that have a portfolio, but that’s a issue for another time).

When you go to buy groceries or a new suit, you don’t stop to think where stocks are trading. You think about how much money is in your bank account based on your salary… or you use a credit card and project that you’ll have the money to pay off your debt down the road.

After all, the money you “make” from higher asset prices isn’t actually real money unless you sell the asset. You cannot go into a store and offer to pay your bill with part of your stock portfolio. And most investors have the bulk of their portfolio money in 401(k)s, IRAs, and other investment vehicles which they cannot easily convert into cash without facing a penalty.

Who on earth thinks “I will buy this item today because stocks are up and several years from now (possibly decades) I will sell my stocks and have a lot of money”??? No one but Fed officials apparently.

So while the Fed’s policies haven’t generated any significant growth, one thing they have accomplished is a total mispricing of risk in the financial system. Again, the reason for this has to do with the Fed’s complete and total lack of understanding of basic human nature.

When the Fed began announcing QE programs, the single most obvious trade in the whole world became “front-running the Fed.”

In this trade, traders would buy Treasuries at Treasury auctions only to then turn around and sell the bonds to the Fed a few days (or maybe a week or two) to the Fed. After all, if you know that someone else is going to be buying bonds at a certain date and time in the future… and you know they’re not going to be too picky about the price they pay…why not try to game this system to eek out a profit?

By piling into bonds, traders forced prices higher and yields lower: precisely what the Fed wanted. These folks were looking for profits while the Fed was looking for lower yields (meaning higher bond prices). It’s a match made in heaven.

So how screwed up is the risk profile in the world? Today, the yield on the 10-year Treasury (the benchpark for riskless money according to modern financial theory) is yielding less than 2%

If you were to go all the way back to 1790, the yield on the 10-Year Treasury (or its equivalent at the time) has been lower than it currently is only one time before the Fed started its QE programs, and that was in 1945 at the end of WWII.

Treasuries actually yielded MORE than they are now in the depth of the 2008 collapse when everyone thought the world was ending.

These bonds are the benchmarks for “risk” in the financial system. Stocks, corporate bonds, mortgages, auto loans, emerging market stocks… everything you can name are ultimately priced based on their perceived risk relative to the “risk free” rate of lending money to the US for 10 years.

And believe it or not, Treasuries are actually one of the BETTER bonds to own from a yield perspective. Globally over 45% of Government bonds yield less than 1%… and €2.1 TRILLION in EU bonds now have NEGATIVE yields.

Put another way, the financial landscape is now so screwed up by the Central Planners, that investors are actually INCINERATING their money by lending it to Governments.

What’s coming will be the largest Crisis in financial history. Globally the bond bubble is over $100 trillion in size. It literally dwarfs stocks.

And the ENTIRE bond market is mispricing risk.

This mess will burst just as all bubbles do. And when it does it will be ENTIRE COUNTRIES, not just banks that go bust.

If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis “Round Two” Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

You can pick up a FREE copy at:

http://www.phoenixcapitalmarketing.com/roundtwo.html

Best Regards

Phoenix Capital Research