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Monday, February 15, 2010

P3 - The Ponzi Wave

I keep thinking about the current financial situation of the world.  The EURO is facing its first real test with Greece (and other countries soon to come).  Short interest on the EURO is growing big time.  Yet I am not sure how much that matters at this stage.  It may be early.  Currencies come and go and the future of the EURO is somewhat on the line here.

I talked about the EURO's vulnerabilites back on November 1st in this post Here
is one part:

"But the threat to the Euro probably doesn't reside from without, it likely resides from within. Europeans went to war with each other time and time again over millennium. The inequalities of the current currency system as it is applied over the differing participating countries has the potential to spark unprecedented civil unrest."

Greeks are striking and the Germans are balking at bailing them out. Predictable. And just a start. 

Is this just another currency trade or something bigger?  

There is one theme on contrary investing that I think may end up applying to many trades over the coming years: There are no upside surprises to Ponzi schemes.  Perhaps we can add an addendum to this: There may be no upside surprise to currencies that collapse (duh).

My point is that the EURO is more vulnerable than anyone can imagine.  Remember 1989 when the Berlin Wall came down quickly and the Soviet Union collapsed rather in surprisingly short order?  I remember it well.  There was no "winning trade" in betting on the East German government would survive.

I surmise that the health of the EURO depends on political unity of Europe. I said this in November and now you hear European bureaucrats pretty much say the same thing.  So any bet on the EURO is not so much on the currency itself but a bet on the political system of Europe.  In that regard history proves that is not a great gamble to take.  Not that the EURO would go to zero. But any unexpected re-conversion back into old currencies will be interesting to say the least.  You can play in that playground, but I'll watch thank you very much.

Elliott Wave theory is of course a system that is a contrary system at heart: When things are "darkest", there comes a dawn of new beginnings.  When things are great, they seem like they will always be so (and we sell our souls based on this - see pension promises, etc).  Of course the fall then comes.

But finding where we are on that contrary scale requires some common sense too. Who here believes that 14K will be topped before 6K will be breach?  Based on what?

There is a great awakening going on this country and indeed probably the world soon to follow.  Things are not as they seem and people know it.  The debt loads of the world are a fantasy lie and there is a realization that it is unbearable.

Here is one example: How many believe the US government (or any government for that matter) will ever pay its debt or honor its debt promises?  No one?  Why? I'll tell you: Simple math doesn't lie.  So in that regard is there any "upside surprise" to the world's debt problems? Not if they are considered Ponzi schemes which in fact they mostly are.

Is there any upside surprise to our wrecked and surreal world financial system other than betting on how long it will take for the "point of recognition" on a mass scale to occur?

P3 will see sentiment slide to record lows levels. And there will be great bounces within. But P3 will not end until the Ponzi elements of fraud and excess debt is washed out of the system.  We will no longer have to live an entire lifetime to wonder "what will happen to our debt problems". That problem will likely be answered soon enough in P3 and at the end of P5 of the current bear market.

The financial system is awash in debt and fraud and Ponzi schemes yet unfounded. And it is built on a still-powerful sense of "asset mania" that has yet to break for good.  But it is already breaking.

As Crackhead says in comments [my brackets]:
w1 [P1] realization
w2 [P2] denial
w3 [P3] liquidation

Things are breaking down in a predictable manner:
1. Consumers broke from debt burdens and are in full retreat to this day.
2. Corporations broke from debt burdens and were liquidated or absorbed. More to come.
3. Banks broken from debt burdens were liquidated or absorbed. More to come.
4. Government debt is the last stand. It is now time for it to take central stage in the grand act of P3. Will there not be a predictable ending?

There is no backstopping this last tier of debt.  There are no upside surprises to a government that goes bankrupt.  There will be no Warren Buffetts to bail out Illinois or your local municipality.

P3 is the ultimate wave of social mood that awakens to what a disaster the world's fiat/debt systems have become. Its the Ponzi wave because this is the wave where we remember our simple math.

Its all so freaking bizarre.  Its mass psychosis on a global scale. Get out the popcorn as it will only grow stranger still.
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