The Salami Approach
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, July 21, 2014.
One by one, the salami slices are falling. That's what the Salami Approach is all about - the meticulous carving off of one slice after another - until it's all gone. In this case, what we are talking about is the economy - the increasingly destabilized and decentralizing economy courtesy of a bankrupt society. But this has all happened before you should know, so it's nothing new save the scale. Because it's the entire globe this time around - meaning while humanity has been in similar states previously, on this basis it's 'all new' in terns of outcomes. In this regard, humans know they must behave (unlike animals) because we have the technology to end the world, but at the same time, people will be people, with the players, and greed, and every other sin (that lowers us below animals) that is sure to end the 'good times' one day.
And this is where the Salami Approach comes in to help explain this, where at first the slices are thin and neatly cut as there's no pressure - lots of time. But again, then comes the greed, and the accelerant, fiat money and debt, both growing in unbridled proportion since the US went off the gold standard in 1971. Since then, debt, both in the States and world, has grown many fold, now to the point that despite using all the tricks in the book to keep appearances up, the economy is but a shell (bubble) of its former self, where the salami slices (factors, problems, etc.) are getting thicker (more profound) and uneven (things are spiraling out of control) as we approach the end of life as we know it. Signs of this are blatantly visible in the periphery already, and will soon spread to the core.
As an example of this, just last week we hear of Portugal's largest bank missing a bond payment; and now they have filed for creditor protection. Again, it starts in the periphery, and then moves to the core, meaning global credit markets (including core countries), which incredibly unstable despite appearances will likely become increasingly unstable in the not too distant future. We are already getting signals to this effect in US high yield bonds, which have begun to noticeably under-perform both Treasuries and equities since the beginning of the year. As with the sequencing the took the world into the 2008 crisis, this time around trouble will likely be lead by credit again. It's the accelerating collapse in the marginal utility of debt that's the big problem - it's crashing.
Why does this occur? In one word - the answer to this question is mal-investment. In an artificial / hyper low interest rate environment, like we have today courtesy of QE and ZIRP, capital is invested in non-productive assets that do not have regenerative properties, like the manufacture of staples, meaning the life-cycle of these investments is most often relatively short. A good example of this that is close to home (think the US establishment) is the gaming industry in Atlantic City, which is likely done with the announced closing of the high profile Trump Plaza in September, bringing the total to four this year, and counting. What this does is reveal the collapse is accelerating - accelerating to the point the powers that be will not be able to hide in deceptive television programming and fraudulent statistics anymore - and it's coming closer to those who think themselves insulated by the money printing by the day.
On a different topic, I wish to say a few words on the (second) tragic Malaysian Airlines cash in the Ukraine last week.
On the surface this is a big win for US interests, as it was a Russian made missile that killed many important Russian neighbors, making them angry at whoever did it, not too mention catching a bunch of numbskull traders (in the States) who were dumb enough to short this ruse. Yup, Russell 2000 put buyers came back in on Thursday, which was a perfect set-up for the squeeze going into the weekend. This accomplishes several things, not the least of which being the public becoming use to the idea intensifying war / terrorist attacks are not bad for stocks. And hey, the fact no Americans were on this plane (or the last mysteriously downed Malaysian airliner [think easy and defenseless targets]), is just a bonus right? Nothing bad ever happens over here in Never Never Land - right? It happens somewhere else in the periphery, where the chosen few just (bet on) exploit it.
That would mean this was just another CIA (via the Ukraine) make work stunt (or assassination attempt) designed to jam the stock market higher, while at the same time making the Russian's look bad with all the 'collateral damage'. Only the shadow knows right? But hey, for the Ukraine, or Russian backed separatists, and especially Vlad (Putin), I could think of better ways to hurt the West / Europe than shooting down a plane full of Dutch scientists - something a little closer to either home or American pocket books. But it sure fits subversive American needs well on several levels, even providing the moral high ground for stricter sanctions against Russia announced the day before that make this look like retaliation. Looks like tragic Kabuki Theater to me. But, I will leave you to decide this on your own, because the reality of what happened here will ever be discussed openly. And because of this we have mission accomplished boys and girls - congrats you blood thirsty a**holes - whoever you are.
Of course Vlad knows who did it; although Obama would have you believe something else. This is why you should look at the conviction in the response he makes, as one is surely coming. If aggressive, which it should be (like this), then you will know who really did it if he takes the moral high ground back. Because this is getting serious now in case you didn't know. The war drums are beating both faster and louder as the games and maneuvers are played out. But the mob is still appeased by what they think is growing wealth, or any other distraction you care to name. And this will likely not change until they are not eating and shivering in the dark. Then, and only then, will you have the pampered rabble up in arms - awoken from their dizziness and delusion.
Back to the markets now, with the volatility created by the shooting down of flight MH17 last week, as alluded to above, US price managers were able to ratchet the CBOE Volatility Index (VIX) up a full big figure essentially, while keeping prices at elevated levels. What this does is allow them to come in with an intensifying volatility (financial) repression program moving forward (which they will need due to diminishing returns here too), allowing them to boost stock prices even higher whilst risk adjusted measures (think S&P 500 [SPX] / VIX Ratio) remain within sinusoidal constraints. This game will not work forever, but it's still going now well past five-years since the bottom in 2009, where because of this 'ratcheting' of the fear index, stocks enjoyed an extended push to previously unthinkable trajectories. (See Figure 1)
It's the mania in fear that keeps the VIX contained is a function of the growth in open interest, presently at record levels, seen here. And this has worked fabulously for the bureaucracy's price managers (think Kevin Henry, et al), even some of the ones buying (think hedge funds, etc.), because the game continues. Up until now, VIX related insurance has been cheap for hedgers, but of course far more expensive for naked speculators, many of which have fallen by the wayside. Of course although cheap, this insurance has still cost much in terms of lost performance for hedge fund managers (and their ilk), who as a group lag the indexes miserably. So, at some point they will need to fix this or perish, especially if clients lose capital in a downturn. One would think such an outcome would be fatal, especially with baby boomers increasingly eying retirement.
But it's this paranoia bubble that is the primary reason stocks keep rising, with all the VIX call buying (and stock index put buying), set against an ocean of liquidity that ignites regular short squeezes. Again however, one does wonder just how long money managers will keep increasing exposure to VIX call buying at the expense of returns if the returns are increasingly difficult to come, possibly cause baby boomers to rethink their retirement planning that is likely not going so well. That is to say, if asset managers are under-performing the indexes, what's to stop investors from pulling the plug given the right reason, as frustration levels must be rising? Add to this the observation living costs are now rising noticeably, well past official statistical lies, and we have the reasoning behind why stocks may not rise forever despite all the money printing and speculation.
Because if not this reasoning, something else will prick the larger (credit) bubble at some point, and we will have yet another profound deflation scare as asset prices are hit by hibernating fears once more. And this time, if it's bad enough, with the pain extending further into what remains of the middle class, the masses may not be so sanguine. With debt levels so high now, many will be devastated by a hollowed out economy with neither real monetary reserves (gold) nor capital stock (manufacturing base) to fall back on. Thus, the only way out for US (Western) officials will be to do what they have been doing, which is to further debase the currency(s) or face the music, which in this case is depression. The only problem is as things continue to accelerate, which includes diminishing returns on such activities, the money printing gets 'out of hand', and we have some degree of hyperinflation.
Thus, once we have whatever degree of a deflation scare resulting from a stock market liquidity related event, we will have an inflationary reaction (think accelerated money printing) from Western central planners, led by the Fed, that you will need to protect yourself against in real assets, led by gold. It's just a repeat of what happened in the year 2000, and 2008, only bigger. So again, in the meantime we are looking for an identifiable signature in the stock market topping cycle, which as you can see above in Figure 1, is likely not completed as of yet. Again, as per previous discussion on the subject, with this VIX related ratcheting, US price managers are now in position to push the SPX over the large round number at 2000 (or it will crash) while keeping the VIX within what is viewed (by them) as a prescribed range.
The only problem for them is short of hyperinflation, which again, could be coming in later years, it's not likely the SPX / VIX Ratio will make it past indicated sinusoidal resistance denoted above before a reaction is finally triggered, possibly taking prices all the way back down to noted support. That is what is expected when a sinusoidal wave is in the pattern - a return to opposite amplitude extremes. That's what uninterrupted wave patterns do, where if central authorities do not print enough new currency to overcome diminishing returns, the risk adjusted stock market is sure to do.
Good investing all.
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