Ben Davies - We are Seeing 2008 Style Crash Signals

With so much fear and uncertainty in markets around the world, today King World News interviewed Ben Davies, CEO of Hinde Capital.  Davies alerted KWN that his firm is seeing crash signals similar to those of 2008.  When asked about these signals, Davies responded,“We’re seeing that lending spreads are widening.  Certain rates are starting to look stressed.  Clearly there’s a funding issue brewing within the banking sector with what’s happening in Europe.  High yield spreads are beginning to widen as the corporate sector is getting crowded out by the needs of the sovereign nations, who keep issuing unbelievable amounts of capital or pseudo capital.”

“They need to keep rolling that over.  Just take Italy alone who’s got nearly $350 billion to do next year, that’s just one country in a 1.9 trillion debt market.  Over the next four years they will have to recycle 60% of their debt and this is the problem here.  So these crash signals are just showing us that there are severe stresses in the system and they are starting to get to the extremes that we saw in 2008, just before the Lehman crisis.

What is potentially different this time, is the Lehman crisis, in many ways, although we were building up to it, no one thought that they would actually let a bank go under at that stage because JP Morgan effectively had to buy out Bear Stearns.  

So I think the difference now is that we all understand that Greece is effectively defaulting, whether it’s orderly or disorderly is another matter and that the contagion is happening.  We can see it.  And policymakers are really at a loss for what to do.  

Take the Germans, do they really want to go into a fiscal union and pay for profligacy of the periphery?  This is the ultimate question.  Although I see these crash signals starting to go off, I cannot again get too bearish on risk assets because I really feel, at this point, that the ECB is going to acquiesce....

“I think they are going to go into full monetization.  I mean for all intents and purposes they have expanded their balance sheet over the last few years.  They may not be doing tacit purchases, but as far as I’m concerned they have been doing stealth QE for a long time.

But I think they are going to be overt this time and I think they are going to say, just like the Fed, ‘Look, we’ve got real deflationary pressures.’  A bit like the RBA cut rates, citing deflationary pressures.  Now I think that means they will come and buy bonds across the curve in the secondary market.  

I’m talking here about Europe coming in and starting their official program of quantitative and potentially qualitative easing.  Should they (the ECB) not do anything, the Fed will have to step in.  I think they would want to stabilize the threat to the banking system over there in the US.  I think there will be a form of QE coming in the US.

So they are going to have to introduce some financial repression tactics, which just means they will do some money printing.  Now if that happens I cannot be short risk assets, I cannot be short silver and I cannot be short gold.”

Davies also noted, “There is no doubt that we are hitting monetary and fiscal constraints.  The balance sheet of the Fed is 50 times levered relative to 2007 when it was 25 times levered.  That means that effectively 2% down on that portfolio and you wipe out all of the equity.  Effectively, without printing more money, they (the Fed) would be insolvent.”

SP 500 Technicals: Is It 2008 All Over Again?

When I was looking at some long term charts, I found out that the current situation for the SP500 is very similar to the situation in 2008.

Check out the following chart below, and you will see why…

- The RSI hasn’t been overbought anymore in a long time, indicating weakness in stock markets… The same was true in 2008.

- The SP500 found heavy resistance in the 1260-1280 zone (just as we warned our subscribers), which was the low of June 2011. A similar thing happened back in May 2008, where price ran into resistance of the November 2007 low.

- Look at the exponential moving averages (20, 50, 100 and 200 EMA’s). They have now been converging as price rallied, but right now, price is falling below these EMA’s, just like in late May 2008.
- The MACD is now flirting to break the green support line, just like in May 2008, right before financial armageddon occured, and price is right at the green support line now, just like in 2008.

Chart courtesy stockcharts.com

If we are about to see the exact move as in 2008, this is what it would look like…

Chart courtesy stockcharts.com

The Ted Spread, which is the difference between the interest rates on interbank loans and on short-term U.S. government debt or “T-bills”, is rising. This indicates that the banks don’t trust each other anymore. The same thing happened in 2008.

Chart: Bloomberg

One positive thing however, is that when we look at the big picture, we are nowhere near the 2008 highs (yet)…

S&P pattern

The S&P 500 index is in the progress of potentially forming a “Three-Peaks and a Domed House” pattern as shown in the chart below.

My version of George Lindsay’s basic model uses a macro or “phase-counting” approach which is different from Lindsay’s classical micro approach (which uses “number-counting” from 1 to 28) in that it divides the “Three Peaks and the Domed House” pattern into five major phases as follows:

1. Three Peaks
2. Basement
3. First Floor
4. Roof
5. Plunge

Currently the S&P 500 index is in a phase transition from the “Basement” phase (bear trap) to the “First Floor” phase with a sharp advance wave from point 14 toward point 15 according to George Lindsay’s original model (click the graph to see a larger image). The “First Floor” phase is projected around 1360 for the S&P 500 index. The current pattern tracking with model stands true until proven otherwise.

Chart for week-ending November 11, 2011 (Close 1263.85)

Chart for week-ending November 4th, 2011 (Close 1253.23)

Warning sign..mark the date Fall 2012

It is been my belief that stocks and the economy have been locked in a secular bear market since March of 2000. During that period we've had two recessions and two cyclical bear markets. One of those recessions was the worst since the Great Depression and the last bear market in stocks was the second worst in history.

I've said all along that printing money will not cure the problem we've gotten ourselves into. It's never worked in history and it's not going to work this time either. We can't solve a problem of too much debt with more debt. All we will accomplish is to make the problem bigger.

We are now fast approaching the period when the next crisis should arrive.

On average the stock market suffers a major correction about every four years. In a secular bear market that cyclical trough arrives as the economy sinks into recession and a stock market bear bottoms out.

The last four year cycle bottom formed in March of `09. That just happened to be the longest four year cycle in history. I've noted before that long cycles are often followed by a short cycle that compensates for the extended nature or the prior cycle. If that's the case then the next four year cycle low is due sometime in 2012. (My best guess is in the fall.)

As we are still in a secular bear market then the move down into the four year cycle trough should correspond to another economic recession and cyclical bear market for stocks. Bear markets tend to last about a year and a half to two and a half years. If the next four year cycle bottoms in the implied timing band then the current cyclical bull should be topping soon.

As a matter of fact the stock market is already flashing warning signs. Three of the largest and most important sectors in the S&P have not confirmed new highs.

Another warning sign; Despite record earnings the market has only been able to move to marginal new highs and is now in jeopardy of reversing the recent breakout.

I've noted in the past that this is how major tops and bottoms are often established. Smart money sells into the breakout, or buys the break down in the case of a bottom. The trend then reverses and a major turning point is formed. Both the `02 bottom and the `07 top were put in this way.

The market is now at risk of a similar event as we've experienced a marginal breakout to new highs that is threatening to fail. Don't forget this is happening against a back drop of record earnings.

When a market can't move higher on good news something is wrong. And don't forget bull markets don't top on bad news, they top on good news.

If the market can recover and move to new highs the cyclical bull will be confirmed, but if the market continues to fade and drops back below the March 16th "tsunami" bottom it will constitute a failed intermediate cycle. If both the Dow and the Transports close back below that level we would have a Dow Theory sell signal and that would confirm the next leg down in the secular bear has begun.

It would also be a signal that the economy was unable to handle the spiking food and energy costs that were the direct result of Bernanke trying to prop up the financial system with his printing press.

Like I said, printing money has never been the answer. Every empire in history has tried this approach and not one of them has ever succeeded with it. We won't either.

source:http://www.kitco.com/ind/Conner/may162011.html