“Excuses change nothing, but make everyone feel better.” – Mason Cooley

The most highly anticipated Fed decision (since the last one…and the one before that…and the one before that) is coming next week. Endless debate over whether the Fed will raise rates now or later seems to be the norm. I suspect if/when the Fed ever does decide to raise rates, it will be a cathartic moment for the vast majority who have been arguing rates would soon rise for over three years. Expectations for central bank tightening have increased markedly in the last several weeks not just in the US, but in Europe as well. Suddenly, in the blink of an eye after futile attempts to spur inflation, it appears market expectations have shifted into thinking central banks have finally won.

Hold the phone – it’s not that simple. Growth in the US and Europe (NYSEARCA:VGK), for lack of a better term, has been nothing more than “meh.” Despite extraordinary monetary easing, nominal GDP figures remain lackluster. What about jobs and payroll growth? While unemployment has fallen and wage pressure does appear to be rising, the counter-factor is the labor participation rate, which is essentially at historic lows. The unemployment rate appears healthy purely because the number of people seeking employment has fallen relative to the number of discouraged workers who are unable to find strong job prospects. Indeed this can change as more and more employers hire, but the Fed may use that as an excuse to keep rates lower than the market anticipates despite their desire to “normalize” monetary policy. This is essentially the argument that the Fed wants to overshoot on inflationary pressure on the hope that such an environment will soak up new job entrants who otherwise would re-enter and actually cause the unemployment rate to rise because of their re-entry.

Having said all that, certainly there are members of the Federal Reserve who are desperate to raise rates, and raise them now. The argument is simple – if not now, when? The market appears to have prepped for it, the yield curve in June has steepened as seemingly out of nowhere long duration Treasuries have sold off, and all of this “cheap money” has fueled a stock market which Yellen herself admits appears overvalued. The movement in Treasuries (NYSEARCA:TLT) is important near-term, as shown in our award winning paper (click here to download it). It would be quite welcome for the economy if capital had cost and savers were rewarded for prudent personal financial management, rather than speculation in financial assets. However, as we have learned from numerous other times, the Federal Reserve tends to err on the side of easing, not tightening. Between the labor participation rate and continued uncertainty over Greece, the market’s expectations for a rate hike may be at odds with what the Federal Reserve does at this next meeting and the ones to come. Those betting on a continuation of the Dollar’s rise may soon be disappointed as a result.

This has been a strange year so far as bonds, commodities (NYSEARCA:DBC), and currencies have all increased in volatility alongside emerging markets and Europe, while the happy-go-lucky S&P 500 (NYSEARCA:SPY) remains in a tight trading range. Something big is likely to happen to US equities as this range eventually breaks and money either positions aggressively for further gains, or defensively for the long-awaited correction which has the makings of being rather severe given complacency and margin. Should the former occur, the relative correction in emerging markets presents a meaningful opportunity for long-only traders and asset allocators. Should the latter take place and US stocks finally break down, market participants will likely be reminded that it is far more important mathematically to avoid major declines in broad beta than participate in advances.

Either way, we stand ready as the cycle begins to favor the anomaly we are trying to capture in our investment strategies – volatility predictability, and positioning before it happens.

Small Sample On,
Michael A. Gayed, CFA
www.pensionpartners.com

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

In the wake of the IMF walking out of negotiations with Greece, the Financial Times says the Pullout is Amid an “Air of Unreality”.

What’s Unreal?

Sure, everyone expected Greece to buckle. But what if Greece did buckle for the nth time? Greece was eventually going to default anyway.

There is not now, nor was there ever, anything “unreal” about the inevitable default.

Earlier today German officials said “European taxpayers have been generous” to Greece. What a hoot. Now, that’s “unreal”.

What’s also “unreal” is forcing €330 billion worth of debt on a tiny country, pretending that it can be paid back.

This alleged “generous” bailout did nothing but bail out banks while forcing a hellacious depression on Greece. Taxpayers have not footed the bill yet, but they will, thanks to bondholder and bank bailouts.

Some blame Greece. And to be sure Greece made mistakes. But the real culprits are the ECB’s one size fits Germany interest rate policy, the stupidity of the eurozone agreement itself, the lack of a fiscal union, etc.

Everyone knew Greece lied to get into the eurozone. They let Greece in anyway. Isn’t that “unreal”?

“Do You Feel Lucky, Punk?”

The Guradian reports the IMF walkout this way: IMF to Alexis Tsipras: ‘Do you feel lucky, punk?’

“You’ve got to ask yourself one question. Do I feel lucky? Well, do ya, punk?” The lines spoken by Clint Eastwood in Dirty Harry sprang to mind when the International Monetary Fund (IMF) announced that it had called its Greek negotiating team home from talks in Brussels.

The IMF’s message was short and brutal. There were still major differences between Greece and its creditors. There was no progress in narrowing those differences. The two sides were well away from an agreement.

The IMF, clearly, has had enough. This, then, is the IMF holding the gun to Alexis Tsipras’s head. It feels like a pivotal moment, the point where the creditors are saying “take it or leave it” and the Greeks have to decide whether the IMF really means it.

They are fed up with Tsipras acting like he is the one holding the .44 Magnum and they are threatening to pull the trigger.

This movie climaxes next week.

Who Has the Gun?

The IMF? OK. Pull the trigger.

Tsipras wants someone to blame. If he can point the finger at the despised IMF, the IMF will effectively have shot itself.

Greece has nothing to lose. The Troika does have something to lose.

Let’s look at things from the point of the best case scenario.

Best Case Scenario

1. Greece defaults.
2. Greece sheds €330 billion worth of debt.
3. Greece opens up trade with Russia, killing EU sanctions once and for all (and exposing the stupidity of the unanimous nature of EU rules in the process).
4. Greece threatens to yank US access to the US military base in Crete.
5. Russia builds pipeline through Greece. In turn, Greece collects shipment and storage fees.
6. Russia provides interim funding for Greece until Greece runs a primary account surplus.
7. The interim agreement from Russia requires Greece to initiate some market reforms that will pay big dividends down the road.
8. Greece reforms and does very well in a relatively short time frame.
9. Italy, Spain, Portugal, get some clever thoughts of their own.

US Naval Base in Greece

The military Base is in Souday Bay, Greece.

Note the strategic location.

In August of 2013, the US Asked Greece for Military Base Access in Kalamata and Souda for a possible strike on Syria over the alleged use of toxic gas in Ghouta on the eastern outskirts of Damascus.

In 2013, Greece said yes. What will they demand to say “yes” the next time?

Nothing to Lose

From my perspective, Greece has nothing to lose.

To be sure, Greece would be far better off defaulting and reforming rather than simply defaulting. But default is the best option for sure.

Even staunch euro supporter Wolfgang Münchau agrees. See his April 19 column: Greek Default Necessary but Grexit is Not.

For my take on Grexit, please see Can Greece Default and Stay in Eurozone? Russia is the Key!

When default is inevitable (and it is), it’s best to do it sooner rather than later.

When You Ain’t Got Nothing

I offer a musical tribute to Greece. Click here to play “Like a Rolling Stone” by Bob Dylan.

It’s an excellent video, but not directly embeddable. Click on link to play.

Key Lines

Now you don’t seem so proud
About having to be scrounging for your next meal
…
You said you’d never compromise
With the mystery tramp, but now you realize
He’s not selling any alibis
As you stare into the vacuum of his eyes
And say do you want to make a deal?
…
When you ain’t got nothing, you got nothing to lose

Speece Revisited

Some will insists this is all Greece’s fault. Most others will insist it’s primarily Greece’s fault.

Actually, it’s neither of those.

I make the case in From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About “Speece” and Gold?

The big fear out of the eurozone should not be that Greece fails miserably, but rather that Greece succeeds!

Success as I have pointed out above is quite possible. If Greece were to immediately initiate the necessary reforms, I would even go so far as to say “success is likely”.

Unfortunately, I don’t believe Greece will reform.

Regardless, Greece is better off without a €330 billion albatross around its neck for the next 40 years.

In the previous post Tom McClellan highlights Peter Eliades’ work on the cyclical top due in the S&P 500 this year. To add some color to it, here is the chart I produced for NFTRH subscribers several weeks ago after purchasing and reading an Eliades report myself. His work came to my attention by way of Robert Prechter.

Bear in mind that this big picture cycle is a blunt tool, much like market sentiment or other indicators that show risk, but for extended periods, little risk discovery. So as McClellan mentions, it takes much finer detail management to gauge a topping process. That is what makes market management interesting and sometimes even fun; adding details and color to big picture theses.

We should not look at one chart and its message without cross referencing other charts, data and indicators. The best risk vs. reward scenarios come about when multiple data points come to similar conclusions.

Anyway, staying on the big picture, here is another monthly chart of the S&P 500 we have been using in NFTRH that shows yes indeed, a top (of some kind) is indicated by the monthly MACD signal, but…

…that each of the last two major tops included a bearish MACD signal that preceded a drop to the monthly EMA 20, which turned out to be a pause to refresh prior to ultimate bull market highs in both cases.

Will it be different this time? Very possibly, but also very possibly not. The stock market cycle indicates that it will be different because the S&P is supposedly due for a major top. But the color and detail can only be painted in by doing the shorter-term work each week. Especially since this cycle has had a certain ‘rule breaker’ aspect to it, due in my opinion to historically aggressive policy maker inputs (and resulting distortions) from its birth in Q4 2008/Q1 2009 to today.

Subscribe to NFTRH Premium for your 25-35 page weekly report, interim updates (including Key ETF charts) and NFTRH+ chart and trade ideas, or the Free eLetter for an introduction to our work. Or simply keep up to date with plenty of public content at NFTRH.com and Biiwii.com. Oh, and follow @BiiwiiNFTRH.

What you missed since the VICE Letter was launched!

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        • Mark added the Bitcoin Investment Trust (GBTC) on May 19 at 29.00 and it soared to 33.00 in two days.  Still long here, now trading at 30.65.

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We now inhabit a world where virtually everything is a con. 

Which brings us to China, one of the greatest credit bubble and financial cons ever.…..continue reading HERE

.…..continue reading HERE