The 1 yr T-Bills:


Remember, this can also mean the boys are playing the bond game also.

The 2 Yr T-Bill


Note the slight turn up already on the 2 year bills – not usual in the bond game – too long a term.

The 20 yr Note:


Note – way over on the right, the rates are now exceeding the pre-panic rates.

It appears the rates for these bonds seem to indicate by the summer of 2010 we should be raising interest rates.

Next – check the banks – do the banks have any cash?


Wow, there’s the pig – see how it’s also reflected in the short term interest rates.  Typically the money flow works likes this:

The FED buys the bond/Tbills by turning on the printing press and makes some new paper they call money.  They purchase the bonds.  As you see above it’s a credit to the Bank but a debit to the US taxpayers – they just added to your debt – nice guys!

The bond market receives the cash first, hence the bond prices leap up and the rates plunge.  If the bankers do not speculate in the bond game to make some free money off the FED & you the taxpayer, the bonds are sold and the next to get cash (besides the attorneys – The Firm you know) is the stock market.  Other investment vehicles come after that.  OK checking the market for the pig we see:


Yes, there you are, just showing up.  Now you can see why this current stock market has jumped and should get about 50% gains this year – amazing huh!!  Note the transportations and the utils and energy stock (and of course gold and silver) are making their moves.  They started to move out about April 2009.  They should good to go until the spring of 2010.

OK down we go through the snake – the next operators that get a taste are the “normal” commercial bankers.  Sometimes the larger commercial banks sell their bonds directly to the Fed (like in this last Panic) – they get to feed directly from the trough.  Their reserves get a bounce – as noted Citibank, BOA, etc are much better off today – thanks America.  The money received from these transactions are supposed to go in those big savings accounts those guys have and should be loaned out as commercial paper, but as mentioned above, they also like to save you and park these funds in the Reserve and make some free money – for the Firm of course.

Keep in mind these are just the American numbers – all of Europe and Asia got into this game This vast spread of unified activity has never happened before in history, we have no way to determine the exact effects of this.

OK next – your tax dollars sitting in those Big FED Banks earning money for the banks that did those sub-prime loans.


Any money going out for loans – seems to be some, note the low yields – plenty of cash??


Well anyway, money is supposed to move through the commercial area and be loaned to corps and such.  Haven’t heard of too many big loans happening.  Don’t think the pig has gotten here yet.

Any capital goods happening yet due to these big loans?


Maybe some orders that it – real slow.

Well, then if building is happening, capital goods, steel and cement activity is going up then people should be working and income should be happening.  This is finally how this “stimulus” is suppose to get money in people’s pocket.  Typically it takes up to two years for this to happen – say November 2010.

Checking that –


Gad – nobody has gone back to work yet.  How scarce are those jobs anyway – surely we are building those highways and bridges and wind mills like crazy now, right?


Guess not.

OK so it looks like this doubling of the money supply which we know from the past causes monetary inflation like that of the boom of the late 70’s is on its way.  In those days the interest rates peaked out at 16.5% – wonder what it will be like in 2016 for us?  I can’t imagine.  We appear to be early in this inflation cycle; the money is only in the first phases.  The stock market has some cash now and will have it until Nov 2009 until the spring of 2010.  By then people will be waking up to what has happened and the commodity market will be rocketing up and out.

Remember those days – gold was leaping $50/day, silver jumping $5/day, and oil going from $13.50 to gasp $35/Bbl.  Housing was going up and up – we felt richer but were we really?  After the dance was over in 1982, there was a long slow price to pay.  More S&L action in ’87?

So how do we prepare for this event that is coming again?  Yet this time it would appear to be coming as a tidal wave of inflation to match the wall of cash just launched – a doubling of the monetary supply – what were they thinking?

To Be Continued


But in the Panic of 2008, look what happens.

Zeal’s comments:

In October, the scariest month of the panic when the S&P 500 plummeted 27% in less than 4 weeks, the Fed suddenly expanded the monetary base by $224b.  This was a 25% surge in a single month, just insane.  And it led M0 to rocket to its highest YoY growth rate ever by far, up 36.7%!  But the Fed was just getting started in its unprecedented inflationary campaign.

In November it grew M0 by another 27% over the prior month, yielding 73.0% YoY growth.

In December it again grew M0 by 15% MoM leading to a mind-boggling 98.9% YoY gain.  In 4 short months, the Fed had literally doubled the US monetary base!  Something like this has never even come close to happening before, so we are deep into uncharted inflation territory here.

So every month since the panic ended in mid-December, when the VXO fear gauge fell back out of panic territory, I’ve been watching M0.  In 3 of the 4 months since (May data isn’t out yet), the Fed has actually grown M0 further!  In January, February, March, and April, the absolute annual M0 growth rates weighed in at 106.0%, 88.5%, 97.9%, and 111.0%!  And in April alone M0 surged to a new all-time record high.  And by late April the stock markets had already rallied 29%, yet the Fed was still rapidly growing M0.

Nothing like this has ever happened before, not even in the 1970s during the last inflation scare.  So the inflationary impact of a doubling of narrow money in 4 months will certainly be serious.  Exacerbating this effect, as consumer spending recovers and bids on now-depleted inventories of consumer goods, prices will also be rising for pure supply-and-demand reasons.  This will be perceived as inflation by most people, so we’re probably facing a perfect storm of inflation.


And a shorter view:


This huge pile of money is going to go somewhere and the Fed was still at these 100% levels in August 2009.  As Zeal mentions nothing like this has happened in the United States before (the Civil War is excluded here), but in other parts of the world in the modern era, it has.  After reviewing the German hyperinflation of the 1920’s and the more recent 1990’s inflation in Russia (and with other published estimates), it would appear that we would normally expect an inflation rate from 12%-18%.  Some experts put this as high as 25%.  This all must be tempered with the facts that as the money moves through the system, things happen to the money flow that was not intended by the government.  All these hyperinflation projections claims have been denied by Bernanke.

As in the 1930’s, when the FED money flow was increased (they really did try to flood it!), the commercial banks instead of loaning the money (hence increasing velocity) they parked the money into the Fed Reserves.  There they are paid a guaranteed rate on those parked funds – a great deal.  This led to more speculation in the bond market (prices go high and the rates drop) with very little of the money making it through the snake to the consumers.  Banker’s delight!  Anyway, back to today, the next measure of money, the M1 even though heavily composed of the MO, only took an 18% bounce during this same period in 2008.  So our banker’s buddies either used the rest in paying down debts, putting money over in the Fed Reserves (i.e. they get the 1.5% rate not the taxpayers) or shipped it overseas to the other buddy CBs – I suspect all of the above.  This 18% bump, instead of the full 100% may temper the wave of inflation to come – more to the 12% and not above the 18%.  So maybe this is what Bernanke was alluding to in his anti-inflation statements – he farmed it out to the world.

So it will be up to the government to push these bankers off their bonuses and get the money out to circulate.  It is not that these bankers are blind to what they are doing.  It is maybe that they feel they are doing the people a favor by withholding the money, because they know the results of this the full effect of this wave of money once its gets to the consumers.

The charts in Part 4 seem to indicate that some of the money is right on schedule the “pig the anaconda swallowed” is moving through the system.

To Be Continued:

As before – TKS to Zeal LLC for the use of their charts.


Looking at the Panics:

What has not been shown in Part 1 was a discussion about the 1907 “Panic.”  The 1907 Panic was over 102 years ago and there is nobody alive today that traded that market.  We do have books however and the most important one of that era was the ones written by (or about) Jesse Livermore – a real time operator working it from the late 1890’s until his death in the 1940’s.  His written description of the panic and the aftermath are eerily similar to what we have just experience in the Panic of 2008.  It is a panic of extreme fear which caused this market to unload like it did – it is not deflation or a depression – wrong time and the sequencing is not correct.  Below is the average returns of the market of that era and how it compares to what just happened:


The next graph is an adjusted overlay of the two Panics – note the similarities.  The Panic of 1907 was worse than the one we just went through.  The notes on the Great Depression are the notes depicting a “crash.”  Again a crash is not a panic; there are different sequences to these two events.


In the Livermore books, he showed how he made a great deal of money leading up to the market top and betting on the aftermath of the panic itself.  He started by plowing money into UP in 1906 when the market was roaring.  Then San Francisco earthquake happened – his stock went thru the roof.  He was leery in 1907 – he had been in the market for over 12 years by this time.  He sensed a great weakness in the financials (he cited the Boar War, Spanish American War – there was a credit squeeze crises brewing in banking in those days.) and he started making “short” or put  bets on the high flyers of the time.  Yep, it was the same transportation stocks he just rode up.  Like the Panic of 2008, those stocks were the first to break as the credit squeeze intensified.  Late in the summer of 1907, there was no money left to loan at the normal “money post” of the exchange floor.  Both Panics had a money cause or the lack there of.  Both markets broke sharply in the October of their respective market year and both bottomed in the November of their respective year.  During his time, in one day Jesse made $1.0 million 1907 dollars.  He later said that there would be a rebound in the market, but he did not play it – he bought a yacht in Florida and went fishing.  He later began to play the commodities and was into them as WWI began.  To him paper was dead for a while and it was time for the commodities.

This current work indicates that there should be a post bear panic rally, which may last about a year and gain as much as 50%.  It should last about 1 year – money rolls into transportation and utility stocks quite readily – but more on this later after the discussion of the inflation issues.

Our closest kissing cousin to these deep panics which has the so-called modern remedies is the secular bear crash of 1975.  The following charts are close-up snap shots of what the effect of this panic of 75 when compared to the Panic of 2008.


Overlaying the two S&P500 charts we get:




Hence, my description of its summer of 1975 again.

Zeal’s description of the charts:

While 2008 was the first full-blown stock panic in 101 years, 1974 was certainly no picnic.  Instead of plunging 27.1% in less than 4 weeks like the SPX did in October 2008 at the worst stage of our recent panic, the SPX plunged 24.6% in 8 weeks leading into October 1974.  That sell off wasn’t quite at panic-type speeds, but it was certainly of panic-type magnitudes.  Investors were terrified in late 1974 just like they were in late 2008.

At the height of the stock panic in late November, the flagship S&P 500 stock index had plunged 49% year-to-date.  Fully 2/3rds of this decline happened in the 9 weeks leading into the panic lows!  Naturally the psychological impact of such an epic sell off was utterly massive.  Fear exploded to unprecedented extremes

A stock panic is a bubble in fear, and succumbing to this overwhelming fear leads to irrational selling near lows.  But interestingly at the time, investors failed to recognize this truth.  They sold aggressively, and they wrongly assumed their selling was rational.  Of course the only thing that would warrant a 38% loss in the stock markets in just over 2 months was a new depression.  So depression fears mushroomed.

The secular bear that started in 2000 is indeed alive and well.  We are only about halfway through its 17-year span.  Still, coming out of the bottom of its secular trading range a mighty cyclical bull has erupted.  This should lead to a 100%+ total gain in the SPX over the coming years.  There is absolutely no contradiction in this cyclical-bull-within-a-secular-bear worldview.  It is coherent, logical, and historically sound.

Bear in mind, like the 1907 panic these panics occurred in a period AFTER the ending of the great secular bull markets – these up and down markets in the words of Livermore, grind on and on – up 26% one year, down 20% the next.  In most other “recession” cases we would normally pull our way out of this situation, as we did in the 2002 bounce (see charts above), but a Panic does different things to people.  This extra ingredient was the Fed/IMF/World Banks pumping a wall of money into the monetary system.  In 1907, the FED didn’t exist, but JP Morgan and his other cronies did.  Their action on the floor of the exchange that one day in November 1907 when they threw cash at anyone that wanted some “saved” the financial system of that day.

To Be Continued:

Again – the credits for charts and text – Tks Zeal.

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