Custom Search

Saturday, March 27, 2010

The Financial Complexity Bubble and Bonds

Bonds have now gotten attention. Wave 5's usually do produce attention.  30-year Bonds are near the long term 30 year channel in prices.  Somehow this channel is recognized that, if broken under, it is very bad for bonds and stocks in general. An interest rate rise of only 2% would be serious headwinds to the economic "recovery".

To me its all part of the ponzi awareness transformation that is occurring amongst the population. I have yet to formulate a "unified theory of ponzi awareness", but I am trying hard to figure it out. Its my theory on how a P3 can occur even if sentinent is bleak.  The underlying postulate (rule of ponzis) is this: There is no upside surprise in a ponzi. Once a ponzi is fully recognized for what it is, it collapses rather quickly. 

Will this happen with bonds? (and hence the equity markets since debt is the underlying leverage behind everything.) 

I think about sentiment everyday and use a sentiment service.  Sentiment is the heart of Elliott wave theory.  There seems to be growing awareness of how sentiment plays an overall part in how markets move. This is also particular among retail.  For instance did you know that the AAII survey has actually gotten more bearish over the last 3 weeks as the market has rallied in the same time?  Is this bad or are they just now aware of how when they answer a survey, people are looking for them to be the "dupes"?

If your smart enough to be answering surveys from AA, aren't you smart enough to figure out why they want you to answer their survey?  Do you want to be the "dupe" who is used to determine if a market top is in place?

I suppose though, that in the end, no matter what the awareness, that they will indeed be the dupes to determine a turn. So in that respect, this market may indeed just chug along until the "correct" level of bullishness finally comes out. Yes, you can call that capitulation to a survey.

Does this matter? I am not sure to what degree.  Programmed trading is starting to dominate the markets and there is a plethora of information that they process.  This ain't your grandma's market.

Another aspect of sentiment is will it be any better at 1200SPX or more? I have seen numerous commenters say "it won't turn until XX is met". Well what if XX is met? Think you'll get your magical turn even then? Won't you be turning bearish then?  Won't the AA survey people get even more bearish the higher this sucker goes?  Won't that keep the turn from happening?

Is there not an awareness that this is yet another bubble of massive proportions and indeed this is the final bubble possible? And this bubble is a debt bubble? A derivatives bubble?  And finally, how about we just call it a financial complexity bubble?

A debt bubble can only be the final bubble. There will be no other debt bubbles in our generation once this pops for good. This is reflected in the waves. Will it really be Armageddon going back to 1970's prices?  Was the standard of living (modest housing, simple financial marlets, etc) in the 1970's that horrible? ( I can answer no it wasn't) Does everyone need to be a millionaire?  Do we need mega-mansions on every corner? Do CEO's really need $100M?   Why cannot banks just do simple banking?

Its a MASS ASSET MANIA and it will not sustain forever.

Another heart of Elliott wave theory is that nature corrects human progress at many degrees of trend.  The complexity that has grown in financial products and the way the world "does business" needs correcting to a large degree.  This correction will not be orderly.

Yes there are signs that things are not right and the shadowy, complex banking world is where the first stressful "unexpected" things occur. They are occurring now:

Read the comments too.

Well back to the simple bond price chart.  

The peak is assumed to be never reached again (complete with a brief overthrow of the channel) We likely saw the top of 30 year bond prices early in 2009.  The pattern seems to be tracing a lazy 5 wave primary wave [1] down but we need a break under $113.12 to confirm. When plotting yields instead of prices, it appears to track better for wave counting (EWI tracks the yields).

Basically I am looking for a double shoulder pattern to the head price peak. a break under $113.12 to the neckline of this double shoulder pattern would be too perfect. And then a rebound wave [2].

None of this is assured of course, its just the best wave interpretation we have for now. Bonds take a long time to move sometimes so its a patient process.  What would scare prices back to a wave [2] retrace?  I can only think of one thing (and it rhymes with "see me")

Eventually bonds will break the 30 year channel for good.  And we suppose that is when "all the same markets" will kick in during the heart of an asset collapse in the heart of a primary wave [3] down in everything (commodities, bonds, equities). This would be when the "financial complexity bubble" gets jolted into a major correction.

So you can see it all does make sense.  And even though we can tell the world about it, will that knowledge and sour sentiment keep it from actually happening? Does a watched pot ever boil? (Well yes of course it does, you just need patience)

Thats back to where I postulate that society in most parts of the world, particularly the western world, a slow transformation is taking place into a general "ponzi awareness" theme and that yes, even when sentiment goes rock bottom, things will still occur as they must. The waves cannot be stopped nor controlled by a single entity like the FED.

Right now there appears to be a lot of outright anger in society. EW theory predicted this.  This bear anger is the result of many things as each individual manifests this phenomena against their own perceived grievances. But when it comes to the financial markets a massive moral hazard is occurring created by the endless bailout polices of governments all over the world and the lack of fear is allowing a massive rally in asset prices. After all, when you have nothing to lose and a moral hazard has occurred, who cares right? The government will take care of it all yes?  A complacent anger fueling P2.

Well the government has nothing but paper promises. As Robert Prechter likes to say, the government is the herd.  We are just not fully aware that we have reached a sort of mass insanity stage of things.  Its slowly creeping into the conscious. And as it creeps even more, anger as the primary bear emotion, will eventually exhaust and be supplemented by mass doses of fear again.

And even when sentiment goes sour, remember the first postulate of ponzi theory states, "when ponzis are recognized for what they are, it collapses rather quickly." Oh yes, this is a bear market rally in my opinion.

Will this all happen this way? Am I way off base?  Time will tell. I do know one thing: We broke the simple math on everything.  It cannot be sustained.  Squaring the math will be a earth-shattering process.

But mankind will go on.  Its a standard of living adjustment.  And in the end, a lush forest grows from a burned out one.
blog comments powered by Disqus