Inside Job - the 2008 Financial Crisis

Video link

http://www.youtube.com/watch?v=bGc_ditjreM

Growth in the Age of Deleveraging (Part 4)

What It Meant For Canada

Canada has distinguished itself through the debt super cycle (Chart 10), though there are some recent trends that bear watching. Over the past twenty years, our non-financial debt increased less than any other G-7 country. In particular, government indebtedness fell sharply, and corporate leverage is currently at a record low (Chart 11).

In the run-up to the crisis, Canada’s historically large reliance on foreign financing was also reduced to such an extent that our net external indebtedness was virtually eliminated.

Over the same period, Canadian households increased their borrowing significantly. Canadians have now collectively run a net financial deficit for more than a decade, in effect, demanding funds from the rest of the economy, rather than providing them, as had been the case since the Leafs last won the Cup.

Developments since 2008 have reduced our margin of manoeuvre. In an environment of low interest rates and a well functioning financial system, household debt has risen by another 13 percentage points, relative to income. Canadians are now more indebted than the Americans or the British. Our current account has also returned to deficit, meaning that foreign debt has begun to creep back up.

The funding for these current account deficits has been coming largely from foreign purchases of Canadian portfolio securities, particularly bonds. Moreover, much of the proceeds of these capital inflows seem to be largely, on net, going to fund Canadian household expenditures, rather than to build productive capacity in the real economy. If we can take one lesson from the crisis, it is the reminder that channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.

Canada’s relative virtue throughout the debt super cycle affords us a privileged position now that the cycle has turned. Unlike many others, we still have a risk-free rate and a well-functioning financial system to support our economy. It is imperative that we maintain these advantages. Fortunately, this means largely doing what we have been doing—individuals and institutions acting responsibly and policy-makers executing against sound fiscal, monetary and regulatory frameworks.

It cannot entirely be business as usual. Our strong position gives us a window of opportunity to make the adjustments needed to continue to prosper in a deleveraging world. But opportunities are only valuable if seized.

First and foremost, that means reducing our economy’s reliance on debt-fuelled household expenditures. To this end, since 2008, the federal government has taken a series of prudent and timely measures to tighten mortgage insurance requirements in order to support the long-term stability of the Canadian housing market. Banks are also raising capital to comply with new regulations. Canadian authorities are co-operating closely and will continue to monitor the financial situation of the household sector.

To eliminate the household sector’s net financial deficit would leave a noticeable gap in the economy. Canadian households would need to reduce their net financing needs by about $37 billion per year, in aggregate. To compensate for such a reduction over two years could require an additional 3 percentage points of export growth, 4 percentage points of government spending growth or 7 percentage points of business investment growth.

Any of these, in isolation, would be a tall order. Export markets will remain challenging. Government cannot be expected to fill the gap on a sustained basis.

But Canadian companies, with their balance sheets in historically rude health, have the means to act—and the incentives. Canadian firms should recognize four realities: they are not as productive as they could be; they are under-exposed to fast-growing emerging markets; those in the commodity sector can expect relatively elevated prices for some time; and they can all benefit from one of the most resilient financial systems in the world. In a world where deleveraging holds back demand in our traditional foreign markets, the imperative is for Canadian companies to invest in improving their productivity and to access fast-growing emerging markets.

This would be good for Canadian companies and good for Canada. Indeed, it is the only sustainable option available. A virtuous circle of increased investment and increased productivity would increase the debt-carrying capacity of all, through higher wages, greater profits and higher government revenues. This should be our common focus.

The Bank of Canada is doing its part by fulfilling its mandate to keep inflation low, stable and predictable so that Canadian households and firms can invest and plan for the future with confidence. It is also assisting the federal government in ensuring that Canada’s world-leading financial system will be there for Canadians in bad times as well as good and in pushing the G-20 Action Plan because it is in Canada’s interests.

Conclusion

It makes sense to step back and consider current challenges through the longer arc of financial history. Today’s venue is an appropriate place to do so. A century ago, when the Empire Club and the Canadian Club of Toronto would meet, the first great leveraging of the Canadian economy was well under way. During the three decades before the First World War, Canada ran current account deficits averaging 7 per cent of GDP. These deficits were largely for investment and were principally financed by long-term debt and foreign direct investment.

On the eve of the Great War, our net foreign liabilities reached 140 per cent of GDP, but our productive capacity built over the decades helped to pay them off over time. Our obligations would again swell in the Great Depression. But in the ensuing boom, we were again able to shrink our net liabilities.

When we found ourselves in fiscal trouble in the 1990s, Canadians made tough decisions, so that on the eve of Lehman’s demise, Canada was in the best fiscal shape in the G-7.

We must be careful, however, not to take too much comfort from these experiences. Past is not always prologue. In the past, demographics and productivity trends were more favourable than they are today. In the past, we deleveraged during times of strong global growth. In the past, our exchange rate acted as a valuable shock absorber, helping to smooth the rebuilding of competitiveness that can only sustainably be attained through productivity growth.

Today, our demographics have turned, our productivity growth has slowed and the world is undergoing a competitive deleveraging.

We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.

It is better to rebalance now from a position of strength; to build the competitiveness and prosperity worthy of our nation.

Growth in the Age of Deleveraging (Part 3)

Managing the Deleveraging Process

Austerity is a necessary condition for rebalancing, but it is seldom sufficient. There are really only three options to reduce debt: restructuring, inflation and growth.

Whether we like it or not, debt restructuring may happen. If it is to be done, it is best done quickly. Policy-makers need to be careful about delaying the inevitable and merely funding the private exit. Historically, as an alternative to restructuring, financial repression has been used to achieve negative real interest rates and gradual sovereign delevraging. Some have suggested that higher inflation may be a way out from the burden of excessive debt. 

This is a siren call. Moving opportunistically to a higher inflation target would risk unmooring inflation expectations and destroying the hard-won gains of price stability. Similarly, strategies such as nominal GDP level targeting would fail unless they are well understood by the public and the central bank is highly credible.

With no easy way out, the basic challenge for central banks is to maintain price stability in order to help sustain nominal aggregate demand during the period of real adjustment. In the Bank’s view, that is best accomplished through a flexible inflation-targeting framework, applied symmetrically, to guard against both higher inflation and the possibility of deflation.

The most palatable strategy to reduce debt is to increase growth. In today’s reality, the hurdles are significant.

Once leverage is high in one sector or region, it is very hard to reduce it without at least temporarily increasing it elsewhere.

In recent years, large fiscal expansions in the crisis economies have helped to sustain aggregate demand in the face of private deleveraging (Chart 8). However, the window for such Augustinian policy is rapidly closing. Few except the United States, by dint of its reserve currency status, can maintain it for much longer.

In most of Europe today, further stimulus is no longer an option, with the bond markets demanding the contrary.

There are no effective mechanisms that can produce the needed adjustment in the short term. Devaluation is impossible within the single-currency area; fiscal transfers and labour mobility are currently insufficient; and structural reforms will take time.

Actions by central banks, the International Monetary Fund and the European Financial Stability Facility can only create time for adjustment. They are not substitutes for it.

To repay the creditors in the core, the debtors of the periphery must regain competitiveness. This will not be easy. Most members of the euro area cannot depreciate against their major trading partners since they are also part of the euro.

Large shifts in relative inflation rates between debtor and creditor countries could result in real exchange rate depreciations between euro-area countries. However, it is not clear that ongoing deflation in the periphery and higher inflation in the core would prove any more tolerable than it did between the United Kingdom and the United States under the postwar gold standard of the 1920s and 1930s.

The route to restoring competitiveness is through fiscal and structural reforms. These real adjustments are the responsibility of citizens, firms and governments within the affected countries, not central banks. A sustained process of relative wage adjustment will be necessary, implying large declines in living standards for a period in up to one-third of the euro area.

We welcome the measures announced last week by European authorities, which go some way to addressing these issues.

With deleveraging economies under pressure, global growth will require global rebalancing. Creditor nations, mainly emerging markets that have benefited from the debt-fuelled demand boom in advanced economies, must now pick up the baton.

This will be hard to accomplish without co-operation. Major advanced economies with deficient demand cannot consolidate their fiscal positions and boost household savings without support from increased foreign demand. Meanwhile, emerging markets, seeing their growth decelerate because of sagging demand in advanced countries, are reluctant to abandon a strategy that has served them so well in the past, and are refusing to let their exchange rates materially adjust.

Both sides are doubling down on losing strategies. As the Bank has outlined before, relative to a co-operative solution embodied in the G-20’s Action Plan, the foregone output could be enormous: lower world GDP by more than US$7 trillion within five years (Chart 9). Canada has a big stake in avoiding this outcome.

To Summarize Thus Far 

• The market cannot be solely relied upon to discipline leverage.
• It is not just the stock of debt that matters, but rather, who holds it. Heavy reliance on cross-border flows, particularly when they fund consumption, usually proves unsustainable.
• As a consequence of these errors, advanced economies are entering a prolonged period of deleveraging.
• Central bank policy should be guided by a symmetric commitment to the inflation target. Central banks can only bridge real adjustments; they can’t make the adjustments themselves.
• Rebalancing global growth is the best option to smooth deleveraging, but its prospects seem distant.

Growth in the Age of Deleveraging (Part 2)

It's the Balance of Payment, Stupid.

For years, central bankers have talked of surplus and deficit countries, of creditors and debtors. We were usually ignored. Indeed, during a boom, the debtor economy usually feels more vibrant and robust than its creditors. In an era of freely flowing capital, some even thought current account deficits did not matter, particularly if they were the product of private choices rather than public profligacy.

When the leverage cycle turns, the meaning and implications of these labels become tangible. Creditors examine more closely how their loans were spent. Foreign financing constraints suddenly bind. And to repay, debtors must quickly restore competitiveness.

Financial globalisation has provided even greater scope for external imbalances to build (Chart 4). And its continuation could permit larger debt burdens to persist for longer than historically was the case. However, experience teaches that sustained large cross-border flows usually presage liquidity crunches.

The Global Minsky Moment Has Arrived

Debt tolerance has decisively turned. The initially well-founded optimism that launched the decades-long credit boom has given way to a belated pessimism that seeks to reverse it.

Excesses of leverage are dangerous, in part because debt is a particularly inflexible form of financing. Unlike equity, it is unforgiving of miscalculations or shocks. It must be repaid on time and in full.

While debt can fuel asset bubbles, it endures long after they have popped. It has to be rolled over, although markets are not always there. It can be spun into webs within the financial sector, to be unravelled during panics by their thinnest threads. In short, the central relationship between debt and financial stability means that too much of the former can result abruptly in too little of the latter.

Hard experience has made it clear that financial markets are inherently subject to cycles of boom and bust and cannot always be relied upon to get debt levels right. This is part of the rationale for micro and macroprudential regulation.

It follows that backsliding on financial reform is not a solution to current problems. The challenge for the crisis economies is the paucity of credit demand rather than the scarcity of its supply. Relaxing prudential regulations would run the risk of maintaining dangerously high leverage—the situation that got us into this mess in the first place.

^{The Implication of Deleveraging.} 

<sup>As a result of deleveraging, the global economy risks entering a prolonged period of deficient demand. If misshandled, it could lead to debt deflation and disorderly defaults, potentially trigegring large transfers of wealth and social unrest.

History suggests that recessions involving financial crises tend to be deeper and have recoveries that take twice as long. The current U.S. recovery is proving no exception (Chart 5). Indeed, it is only with justified comparisons to the Great Depression that the success of the U.S. policy response is apparent.

Such counterfactuals—it could have been worse—are of cold comfort to American households. Their net worth has fallen from 6 ½ times income pre-crisis to about 5 at present (Chart 6). These losses can only be recovered through a combination of increased savings and, eventually, rising prices for houses and financial assets. Each will clearly take time.

In Europe, a tough combination of necessary fiscal austerity and structural adjustment will mean falling wages, high unemployment and tight credit conditions for firms. Europe is unlikely to return to its pre-crisis level of GDP until a full five years after the start of its last recession (Chart 7).</sup>

Growth in the Age of Deleveraging (Part 1)

By Mark Carney, Bank of Canada Governor, 12-December 2011
Link: http://www.bankofcanada.ca/2011/12/speeches/growth-in-the-age-of-deleveraging/

Introduction

These are trying times.

In our largest trading partner, households are undergoing a long process of balance-sheet repair. Partly as a consequence, American demand for Canadian exports is $30 billion lower than normal.

In Europe, a renewed crisis is underway. An increasing number of countries are being forced to pay unsustainable rates on their borrowings. With a vicious deleveraging process taking hold in its banking sector, the euro area is sinking into recession. Given ties of trade, finance and confidence, the rest of the world is beginning to feel the effects.

Most fundamentally, current events mark a rupture. Advanced economies have steadily increased leverage for decades. That era is now decisively over. The direction may be clear, but the magnitude and abruptness of the process are not. It could be long and orderly or it could be sharp and chaotic. How we manage it will do much to determine our relative prosperity.

This is my subject today: how Canada can grow in this environment of global deleveraging.

How We Got Here: Debt Supercycle

First, it is important to get a sense of the scale of the challenge.

Accumulating the mountain of debt now weighing on advanced economies has been the work of a generation. Across G-7 countries, total non-financial debt has doubled since 1980 to 300 per cent of GDP. Global public debt to global GDP is almost at 80 per cent, equivalent to levels that have historically been associated with widespread sovereign defaults.

The debt super cycle has manifested itself in different ways in different countries. In Japan and Italy, for example, increases in government borrowing have led the way. In the United States and United Kingdom, increases in household debt have been more significant, at least until recently. For the most part, increases in non-financial corporate debt have been modest to negative over the past thirty years.

In general, the more that households and governments drive leverage, the less the productive capacity of the economy expands, and, the less sustainable the overall debt burden ultimately is.

Another general lesson is that excessive private debts usually end up in the public sector one way or another. Private defaults often mean public rescues of banking sectors; recessions fed by deleveraging usually prompt expansionary fiscal policies. This means that the public debt of most advanced economies can be expected to rise above 90 percent threshold historically associated with slower economic growth.

The cases of Europe and the United States are instructive.

Today, American aggregate non-financial debt is at levels similar to those last seen in the midst of the Great Depression. At 250 per cent of GDP, that debt burden is equivalent to almost US$120,000 for every American. (Chart 1)

Several factors drove a massive increase in American household leverage. Demographics have played a role, with the shape of the debt cycle tracking the progression of baby boomers through the workforce.

The stagnation of middle-class real wages (itself the product of technology and globalisation) meant households had to borrow if they wanted to maintain consumption growth.

Financial innovation made it easier to do so. And the ready supply of foreign capital from the global savings glut made it cheaper.

Most importantly, complacency among individuals and institutions, fed by a long period of macroeconomic stability and rising asset prices, made this remorseless borrowing seem sensible.

From an aggregate perspective, the euro area’s debt metrics do not look as daunting. Its aggregate public debt burden is lower than that of the United States and Japan. The euro area’s current account with the rest of the world is roughly balanced, as it has been for some time. But these aggregate measures mask large internal imbalances. As so often with debt, distribution matters. (Chart 2)

Europe’s problems are partly a product of the initial success of the single currency. After its launch, cross-border lending exploded. Easy money fed booms, which flattered government fiscal positions and supported bank balance sheets.

Over time, competitiveness eroded. Euro-wide price stability masked large differences in national inflation rates. Unit labour costs in peripheral countries shot up relative to the core economies, particularly Germany. The resulting deterioration in competitiveness has made the continuation of past trends unsustainable  Growth models across Europe must radically change (Chart 3)

Trade Guideline for Thursday (NQ)

2245 is key inflection point for Thursday. The fed would be trying their very best to push the market up for the upcoming Christmas holidays, against intensifying European credit crunch.

• Bullish above 2245 targeting 2285-2300.
• Bearish below 2245, targeting a drop down to 2200

For Europe, Only Way Out Is to Break Up: Kyle Bass

By: Jeff Cox
CNBC.com Senior Writer

With no workable solutions in sight and a sovereign debt crisis only likely to get worse, the European Union is likely to see an ultimate breakup, widely followed hedge fund executive Kyle Bass told CNBC.

Bass, the managing partner at Hayman Capital Management famous for making huge sums from the collapse of the subprime mortgage industry, said last week's EU summit produced "a blank piece of paper" on which "there are no details," causing him to conclude, "It won't work."

"They're going to have to restructure a lot of their debt. Eventually the (European Monetary Union) is going to have to break up," he said. "The adjustment mechanism that these countries need is a much weaker currency. It's very difficult to go through a hard restructuring and become competitive once again as a nation unless you have a currency adjustment mechanism that's associated with your restructuring."

As such, heavily indebted nations such as Greece cannot get out of theirsovereign debt predicament while their currency remains at still-elevated values, though the euro has dropped off significantly against the dollar this week. A currency devaluation, done through central bank money printing, would help cheapen the value of the debt.

The most recent proposal — which Bass called "sophomoric" — would allow banks to borrow at low rates and then buy up the debt, but Bass doubts many large investors will be willing to join and help easethe crisis.

"It's a circular reference that I don't think institutional investors around the world are going to buy," he said. "They might hoodwink some retail investors into buying these things. When you look at the periphery today there are no buyers for peripheral bonds other than the host countries' banking systems that are basically the host countries' sovereign banks. That seems to me like what you would do at the end."

Bass believes central banks will "take the nuclear option" and print money, but not until after debt defaults occur.

"There aren't any buyers of this debt in that kind of size," he said. "I don't see anything yet. Maybe if they come with some concrete data I'll change my mind."

Here is a link for the full interview

http://video.cnbc.com/gallery/?video=3000061932

Trade Guideline for Tuesday (NQ)

As usual, massive buy programs on Monday night caused a large gap-up open on Tuesday morning, trapping  the short-sellers who were force to cover, triggering a short-covering rally all day Tuesday.

The PPT buying programs should continue as they would like to see the market rally (Santa Clause rally) into Christmas to ensure that people would feel happy at Christmas. Will they be successful, only time will tell.

Resistance for Tuesday is 2280, and support is 2250.

• Above 2280 implies the rally is going to continue with next resistance at 2300.
• Below 2250 implies the downtrend is going to resume, next support at 2230.

Trade Guideline for Tuesday (NQ)

With Fitch downgrading France's credit rating, and is now planning to also downgrade Italy and Spain's credit rating, European financial problem is certain to intensify. With the US Federal Reserve not in a position to officially initiate QE3 at this time, the market sell-off should continue, unless the Fed quickly reverse course and officially start QE3.

Is the the Fed's back door QE via dollar SWAP with Europe sufficient to support the currently collapsing market, only time will tell.

But for Tuesday, I will use 2230 as key inflection point.

• Continue bearish below. with potential decline to supports 2180 or 2140.
• Above 2230 implies pause in the ongoing downtrend,  potential move up to 2250 or 2270.

Trade Guideline for Thursday (NQ)

Self-serving speculative attacks on the Euro-zone countries by their adversaries continues to intensify, which led to intensifying credit crunch causing the stocks, metals and commodities to tumble and the US$ to spike up. The plan is clear, to collapse the Euro and gold, so that the US  Federal Reserve can print money as much money as possible without instantly collapsing the US$.

These actions should give the US dollar some extra life before it collapse as well. The currently fast appreciating US$ is putting pressure on the dollar carry trade, causing it to unwind. And as the unwinding intensifies we could see a massive spike in the US dollar. A spiking US$ will crash the stock market, a very delicate juggling act indeed, with many potential unintended consequences.

For Thursday I will use 2230 as key inflection point. 

• Above 2230 implies NQ is in a pullback-up move, targeting a move up to 2260 resistance. If that breaks, the next resistance is 2280 (strong resistance)
• A sustained break below 2230 implies the market wants to tank again, targeting a decline down to 2200, then 2185. 

Trade Guideline for Tuesday (NQ)

NQ opened with a gap-down and run-down to key support on Monday. Failure to clearly break down below support caused NQ to reversed and rallied into the close, closing just below key resistance.

For Tuesday, the direction of the 5-minute trend will depends on whether it will break above key resistance or break below key support. Without a clear and sustained breakout, price will continue to chop between support and resistance.

Key Resistance for Tuesday is 2300, and key support is 2280.

• Above 2300 implies a move up to re-test Friday's high 2225.
• Below 2300 implies a decline down to the next support level 2230-2240.

Price action in gold is indicating that a major money-printing program is coming very soon to Europe and the US. Central banks like to engage in major gold suppression scheme just prior to initiating a major money-printing programs.

 

Trade Guideline For Monday (Nasdaq NQ)

With the 5-minute NQ downtrend trend reversed up soon after the open on Friday, I will be looking for the uptrend continue as long as any pullback down can stay above 2310 area, which is my key inflection point for Monday.

• Above 2310 the 5-minute uptrend should continue with the first upside target of  2350-2360 area.
• A sustained break below 2310 implies the 5-minute trend is reversing back down. If so, the first downside target is a re-test of last Thursday swing low, 2280 area.

European sovereign and banking debt crisis should continue to dominate the financial new this week.

European Time Bomb

Graph showing how much debt that need to be rolled-over by three major european countries, France , Italy, Spain, just to name a few, but there are way more, not in this graph. For example, in December France would need to roll-over $37.1 billion, then $52.9 in January, etc.

Gold and Silver

With the Euro-zone bank-run accelerating on a daily basis, sapping liquidity out of the system, and financial amageddon coming closer, the end of the Euro currency and the total economic collapse of the Euro-zone countries is coming closer and closer by the day, unless of course they engage in massive money-printing to support the collapsing countries and banks.

Money printing can either be done directly by their own central bank ECB or indirectly by the US Federal Reserve via SWAPS agreements. Many europeans are very reluctant to engage in money-printing because of their qute recent experience with hyperinflation/currency collapse in both France during the French Revolution and the Weimer Republic hyperinflation episodes in the 1920's. Because of the overwhelming objection by the public the European governments may have to do a discreet money-printing via the Federal Reserve SWAPS agreement. The concept is the same is the same but most people would never notice it.

Massive money-printing out of thin air is highly inflationary and could easily lead to currency collapse/hyperinflation. When faced with the choice of a total collapse now if they do nothing, or print and delay the financial amageddon, the choice for the politicians and the Keynesian economists who currently dominate the mainstream economic landscape is clear, and that is to print and print money until the total system implodes.

Here is a link to youtube video on the French hyperinflation episodes 1 and 2:

http://www.youtube.com/watch?v=7zvNV-vkEzc

http://www.youtube.com/watch?v=U4aRuiO1OuQ&feature=related

Money-printing program is extremely bullish for the price of gold and silver as these two metals are time-tested alternative currency that cannot be debased by governments, and that is not only a hedge against inflation but also a store of value against sovereign and currency collapse.

When they start to engage in massive money-printing, which they will as there is NO other choice, it is either print & delay the collapse or not print and collapse now, the price of gold and silver should start to break out of the current consolidation zone and starts to break out to the upside again.

Trading Guideline for Friday

Both the 60-minute and the 5-min charts are showing NQ is in a downtrend. For Friday as long as pullback up does not break above 2305, the downtrend should continue, targeting a decline down to lower low, with supports at 2240 then stronger support at 2225

A pullback up that clearly breaks above 2305 would reverse trend from down to up, targeting a rally up to 2320, then 2335.

News from Europe should continue to influence market movement on Friday.

The Coming Euro-Zone and the US Collapse

Euro-Zone meeting on Friday would likely cause some increased volatility in the short-run as short-term market participants enter and exit the market in response to any news leaks from the meeting.

In the short-run the meeting and the news from the meeting would have some short-term impact, but longer-term, the end game will not change, the total collapse of the Euro and the Euro-Zone break-up under too much debt, likely to occur in the first half of 2012, which should then be followed by the US and the US$ collapse before the end of 2012. When the collapse occurs those holding paper will be left with worthless papers. Only those holding "real" assets under their own control will be saved from the implosion.

There is nothing the Central Bankers can do to alleviate the problem except to postpone the day of reckoning (financial amagedon) by printing more and more fiat money, basically putting more debt on top of debt until the whole system implodes, which it will.

In order to address the problem of over-indebted banking system and over-indebted governments, for the European, they either get their funding directly from their own central bank, the ECB or indirectly from the US Federal Reserve through various channels including through SWAPS. As for the bankrupt US banking system and bankrupt US government, they will get their funding directly from the Fed via money-printing.

In both cases, they are going to try to solve the problem of over-indebtedness with more debt, a strategy that will never work. But central bankers and governments do not know what else to do, so they will print and print until the whole system implodes, and it would likey happens in 2012.

Trade Guideline for Thursday (NQ)

Europe's near collapse last week would make this weekend's Euro-zone meeting very critical.  S&P has already put them on credit watch. Should they get downgraded, the whole system can suddenly collapses. Ahead of their Friday's meeting, major western central banks may accelerate their money printing, and pushing the market up.

For Thursday, I will use 2320 as key inflection point.

• Bullish above, targeting a move up to 2340, then 2370.
• Bearish below, targeting a decline down to 2280, then 2260.

Trade Guideline for Tuesday (NQ)

2330 is key inflection point. 

• Above it implies a re-test of Monday's high. A sustained break above implies short-covering rally targeting 2360-2370 resistance, but a false break above Monday's high implies fast reversal down.
• Below 2330 implies a re-test of 2300 support. A sustained break below implies a fast liquidation decline down to 2370 support. A falsebreak below 2300 implies a fast reversal back up.

With the Euro-zone on credit watch for future downgrade, the stage is set for a continual acceleration of a credit contraction, which would be bearish for stocks, unless of course central bankers are willing to print more and more money to support the market.

Trade Guideline For Monday (Nasdaq NQ)

On Friday, NQ opened near the high of the day and closed near the day low, just above key inflection point (2300) for Monday.

• Support is 2280, 
• Resistance is 2330.

MF Global Collapse - Implications

A market insider, Ann Barnhardt expose.  Ann passionately lays the whole scheme bare, explaining the massive implications this has for the US legal and financial systems, not to mention how investors should prepare in the face of systemic corruption.

Listen to her interview here.

http://www.financialsense.com/financial-sense-newshour/guest-expert/2011/12/01/ann-barnhardt/entire-futures-options-market-destroyed-by-mf-global-collapse

Trade Guideline for Friday (NQ)

New rounds of money-printing to bail out the collapsing European/US banks and to buy stocks helped pushed stock prices up for a fourth consecutive days. Notice that central banks like to push price up during globex trading because it is much cheaper to do so, hence we keep getting the huge gap-up at the open.

The trend should continue, because they can print as much money as they need, in fact they do not even need to physically print the money as it is just a simple digital entry on the balance sheet. The end game is still the same, financial/monetary/sovereign collapse, it is just a matter of time, but make no mistake, the more they print the worse the collapse will be.

NQ Friday's key inflection point is 2300, bullish above, bearish below.

Central Banks Intervention Raises Questions

Did a big European bank come close to failing last night?  European banks, especially French banks, rely heavily on funding in the wholesale money markets.  Given the actions of the world’s largest central banks last night, it raises the question of whether a major bank was having difficulty funding its immediate liquidity needs.

The Federal Reserve, the Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada in a coordinated action moved to provide liquidity to the global financial system.

In a separate move, the Chinese Central Bank cut bank reserve requirements.  The People’s Bank of China cut reserve–requirement ratio by 0.5%, the first cut in nearly three years.

The problem was not at U.S. banks as is evidenced by the following excerpt from a statement by the Federal Reserve.

"U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses."

These are the type of actions that were being taken during the financial crisis in 2008.  Now most knowledgeable experts agree that not rescuing Lehman Brothers was a mistake.  The authorities are not about to make the same mistake again.  The only explanation for the massive action is that central banks were concerned about a pending failure that is not publically known.  The readers may want to make their own judgment from the following excerpts from a statement by the Federal Reserve.

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.

Trade Guideline For Wednesday (Nasdaq NQ)

On Tuesday, short-covering soon after the open did not attract any buyers, hence the market sold off for the rest of the day.

For Wednesday the key inflection level is 2225. Resistance is Tuesday's swing high 2240.75, support 2200.

• A sustained break above 2225 should trigger another round of short-covering that could easily push price up to Tuesday's swing high resistance 2240.75. A falsebreak above would cause the market to reverse back down to support 2200. However, a sustained break above the high should rocket price up to 2255-2260.
• A sustained break below 2225 should tank NQ down to 2200. A sustained break below 2200 should trigger another round of liquidation , targeting a decline down to 2275-2280.

Trade Guideline for Tuesday (NQ)

A huge gap-up on Monday triggered short-covering rally, with NQ closing near the day high. With key inflection point at 2220 and key support at 2200.

• Above 2200 implies the uptrend should continue.
• Above 2220 may trigger another round of short-covering, targeting a quick move up to 2255-2260.
• Below 2200 implies NQ would likely decline to re-test support at 2275-2280.

European sovereign debt crisis should continue to dominate the financial news, with their main focus on Italy. Should ECD and the US Federal Reserve not come to the rescue by printing money the Euro endgame is just around the corner. But with the mainstream economist all disciple of Keynes, whose only known solution to every economic problem is money-printing, we should expect another round of money-printing by at least the Central Banks of the G7 countries. If so, look for the stock market and gold to rally.

Trade Guideline for Friday (NQ)

With Germany's opposition to the establishment of the Euro Bond to bail out bankrupt Euro-zone member countries, the stage is set for a cascade of sovereign debt defaults, which should further intensify European credit crunch and European bank run, which also set a stage for total market collapse, unless of course Germany change its stance, or unless the ECB is prepared to print as much Euros as needed to bail out banks and countries. If not Euro-zone will disintegrate, and Euro currency will just disappear. 

The impact of European sovereign debt default will reverberate to the US, taking down and collapsing the US banking system with it, and likely the US dollar with it as well. 

Unless there is a massive reversal in policy in regards to addressing the sovereign debt crisis in the Euro-zone, the market decline should continue to accelerate, and crash.

For Friday, key resistance is 2200.

• Below 2200 the downtrend should continue.
• A clear and sustained break above 2200 implies a bigger ABC pullback before it tanks again.

Trade Guideline For Wednesday (Nasdaq NQ)

Tuesday was a consolidation day. It may be ready to trend on Wednesday. If so, it should clearly break and stay below key support level 2200.

Inflection level for Wednesday is 2220, bearish below, bullish above it.

• Key support is 2200
• Key resistance is 2235-2240

European debt crisis and credit crunch should continue to intensify. The next in line for sovereign debt in Europe crisis is France.

Trade Guideline for Tuesday (NQ)

With key resistance now at 2250, failure to clearly break and stay above that level would imply more selling, down to the next support level of 2270-2275.

European debt crisis is now causing an acceleration of credit crunch, if it does not receive a temporary stimulus via quantitative easing, could easy trigger an intense cascade sell-off, aka a crash.

Trade Guideline for Thursday (NQ)

Another consolidation day on Friday following. Following a two-day consolidation I would be looking for a trending move on Monday,  up or down base on where price action would be in relation to key inflection level.

For Monday I will use 2260 as key inflection level.

• Bullish above 2260, targeting 2280 then 2300.
• Bearish below 2260, targeting a decline down to 240, then 2200.

European debt crisis should continue to intensify, and without a major quantitative easing program debt default is inevitable. Any haircut on Italian bond would cause total banking collapse in Europe (European banks who hold their bond) and the US (US banks sold CDS to the European banks).

Trade Guideline for Friday (NQ)

Markets continue to sell-off on Thursday morning breaking down below several support levels down to 2260. It consolidated the whole afternoon setting up a trending move for Friday.

Key level for Friday is 2270.

• Below 2270 implies another trending down move down to the next support level of 2200.
• Above 2270 implies NQ is in a pullback move targeting 2280, then 2300. If it can break 2300 then the next upside target is 2330

Trade Guideline for Thursday (NQ)

Wednesday trading ended with a strong sell-off into the close, with NQ closing just above key support level (2300). The bearish closing momentum should continue on Thursday as long as pullback up stays below 2340. 

• If 2300 support clearly breaks, the next support below it is 2280. 
• It would need a strong momentum move down to break through 2280

European debt crisis should continue to intensify, with most major banks on the verge of collapse, and it seems that no-one country in Europe is in a position to bail out their banks this time around. Banking collapse could trigger massive credit crunch that would lead to massive stock market sell-off unless central banks are prepared to print as much money as required.

Trade Guideline for Tuesday (NQ)

Narrow-range consolidation day on Monday, with NQ staying inside 2300 support and 2400 resistance. For Tuesday 2340 is a key level to watch.

• Above 2340 is bullish targeting a move up to 2380, then 2400.
• Bearish below 2340, targeting a decline down to 2300.

The stage is now set for a total monetary implosion in Europe. The bankers grip on power is getting tighter by the day.

• Greece new Prime Minister is a former Central Banker.
• Italian new Prime Minister is a former Goldman Sachs economist.

Trade Guideline For Monday (Nasdaq NQ)

Equity markets closed on a positive momentum on Friday, right at key inflection level (2350) for Monday. Resistance is 2400, and support is 2300.

• For Monday, above 2350 NQ is going to rally up to 2400 resistance.
• Below 2350 NQ is going to drop down to 2300.

Only a major economic event, such as major unexpected news from the European debt crisis that can knock off prices beyond the 2300 support and 2400 resistance for NQ.

Trade Guideline for Friday (NQ)

Following a massive sell-off on Wednesday the market consolidated all day on Thursday. Depending on where NQ opens on Friday in relation to key inflection level 2300, it could rally in the morning up to 2320 or 2340 then sell-off in the afternoon, or sell-off in the morning then rally into the close.

European debt crisis will continue to dominate the financial news, the focus is now on Italy.

Trade Guideline for Thursday (NQ)

Greek's and Italian's sovereign debt default would collapse most European banks who bought their debts and American banks who sold the European banks Credit default Swaps. Banking collapse would cause countries to collapse as well, leading to a massive credit crunch that should be much more severe that the 2008 credit crunch.

Global stock markets sold off hard on Wednesday closing on a very negative momentum. Without any central banks buying tonight the sell-off should continue into Thursday.

Key level for NQ on Thursday is 2320

• Above 2320 implies NQ is going to pullback up to 2340 then 2355.
• Below 2320 the sell-off should continue down to 2300. If that does not stop the decline nest supports down are 2280 then 2270.

Trade Guideline For Wednesday (Nasdaq NQ)

With a positive momentum into the close on Tuesday, Nasdaq should continue to be bullish as long as pullback down can stay above 2370.  However, 2400 is a very strong resistance. A sustained break above 2400 can trigger a massive short-covering rally.

• A sustained break below 2370 implies a bearish mode, a decline targeting the next support level 2360. Next support below 2360 is 2340.

Speculators are now moving their focus away from Greece and into Italy. Once Italy is done they should move on to Spain and France.

Trade Guideline for Tuesday (NQ)

With a positive momentum into the close on Monday Nasdaq should continue to be bullish as long as pullback down can stay above 2350.  If so, next upside target is a test 2400 level.

• A sustained break below 2350 implies a bearish mode, a decline targeting the next support level 2340. Next support below 2340 is 2320.

Trade Guideline for Friday (NQ)

Open-Test-Drive up on Thursday with a close near the high of the day. If the bullish momentum is going to continue into tomorrow pullbacks should stay above 2350

Sustained break below 2350 implies a larger pullback down to re-test prior breakout level 2320.

Trade Guideline for Thursday (NQ)

NQ remained inside a consolidation zone 2295 - 2325 on Wednesday. 

• A sustained break out implies a trending move in the direction of the break.
• A failed breakout implies a reversal to re-test the opposite range.

Trade Guideline For Wednesday (Nasdaq NQ)

A large gap-down day on Tuesday that was then followed by consolidation for the rest of the day, closing at key inflection level. If consolidation is complete I will look for another trending move, up or down, on Wednesday.

Key price level for Wednesday is 2300.

• Above 2300 implies NQ is going up to 2325-2330 then 2350.
• Below 2300 implies another down-leg on Wednesday targeting a move down to 2250.

Greek Referendum

With George Papandreau now calling for Greek referendum on the latest bankers bailout, the stage is now set for a European-wide bank-run with contagion that would spread like wild fire to the US banking system, which will take the US banking system down like a house of cards, which it is a house of card. Already, MF Global is the first victim of the sovereign debt crisis in Europe, not the last, it is just the beginning. US banks insured the debt through Credit Default Swap. Greek default will undoubtedly trigger the call on CDS.

With numerous reports showing that over 65% of the Greek people would vote against the latest banker's rescue package (50% hair cut), a total default and Greece exit from the Euro-zone is getting closer to being a reality. When Greece vote down the latest bailout the precedent will be set for the rest of the European countries to default as well.

Greek's debt default is sufficient to take down the whole European and American banking system if the printing press is not set to full blast. But with printer-happy Ben Bernankie as the head of the Fed, it is very likely the printing press will be set to work overtime, probably able to prevent total financial collapse at this time, but will set in motion the beginning of the end of the fiat monetary system (currency collapse/hyper-inflation).

But before that happens, European bank run would cause a massive spike in the US$ index as traders and investors rush out of Euro and into the US$, for temporary reprieve, because the US dollar is next to collapse. There is nowhere to run and nowhere to hide except in real assets (gold, silver, commodities, etc), and that is also another reason why Central banks are now going into overdrive in their attempt to push the price of commodities and gold and silver down. Their greatest nightmare is a stampede out of fiat paper currencies and into real asset.

Greece's total default on their debt will set in motion a contagion that could grow too big for any central banks or countries or their concerted efforts to handle. How long will the end game  (debt of fiat monetary system) takes, only time will tell, as it depends entirely on the responses of those in charge of the government and their printing press.

Trade Guideline for Tuesday (NQ)

A gap-down below prior day low triggered Open-Test-Drive down day on Monday with a close near the day low.

If we are going to get a follow-through selling into Tuesday price should stay below 2370.

• Below 2370 target a decline down to 2320.
• Above 2370 is bullish targeting a rally up to 2390-2400.

Trade Guideline For Monday (Nasdaq NQ)

With the European banking system on the verge of total collapse due to the hair cut they would have to take from the Greek sovereign debt they hold on their books, it is very likely that central banks in Europe and the US would print as much money as needed to continue to support the markets and in fact the entire financial system.

This is not to say that their actions would solve the problems. On the contrary, a problem of too much debt cannot be solve with more debt. What they are doing is just going to postpone and exacerbate the crisis.

In the short-run money-printing will continue to lift asset prices. In fact, as we can see from recent Zimbabwe's experiences, asset prices (including stocks) will continue to accelerate their rise as more and more money needed to be printed to bail out the escalating debt problem.

I would expect, as the debt crisis continues to get worse, central banks should continue to print money, the markets should to go up. Many funds who bet against continuous money-printing (short-sellers) by central banks are now getting squeezed.

Key level for NQ for Monday is 2400, and key level for S&P (ES) is 1280.

• Above 2400 implies NQ should explode to the upside.
• Below 2400 implies it is in a pullback or consolidation mode, with downside target of 2350, then 2320.

Trade Guideline for Friday (NQ)

Large gap-up open on Thursday with a close near the high of the day. With the S&P closing at key inflection point, the market is either going to rocket up on Friday or pullback down.

For Friday I will use 2400 as key Line-in-the-Sand.

• Above 2400 implies more rally on Friday, targeting a rally up to 2440.
• Below 2400 target a decline down to 2360.

Trade Guideline for Thursday (NQ)

Market tank hard soon after the open ahead of European decision on what to do with bondholders of Greek debt. It looks like it spooked the Central banks so much that they engineered a massive buy programs to push the market up into the close in order to paint a rosy picture ahead European decision.

The buying binge by some Central Banks should continue for a while in order to paint a rosy picture of the the very messy financial system nearing collapse. Will they be successful in delaying the inevitable total collapse? only time will tell.

For Thursday I will use 2345 as key line-in-the-Sand.

• Bullish above, targeting a rally up to 2380 then 2400.
• Bearish below 2345, targeting a decline down to 2380.

Trade Guideline For Wednesday (Nasdaq NQ)

A down-day on Tuesday, dropping down to just above 2310 support. For Wednesday I will use 2320 as key Line-in-the-Sand.

• Below 2320 the downtrend should continue down targeting a move down to 2300 then 2280
• Above 2320 implies NQ is is going up to 2355. A sustained break above 2355 implies a rre-test of Monday swing high.