Sunday 17 June 2012

Greece Election Eurogeddon Stock Market Trend Analysis and Forecast

The Market Oracle Newsletter
June 16th , 2012            Issue #10 Vol. 6

Commodities Currencies Economics Housing Market Interest Rates Education Personal Finance Stocks / Financials Real Gems

Greece Election Eurogeddon Stock Market Trend Analysis and Forecast

Stocks Stealth Bull Market 2011 Ebook Direct Download Link (PDF 2.8m/b)

Interest Rate Mega-Trend Ebook Direct Download Link (PDF 2.3m/b)

Inflation Mega-Trend Ebook Direct Download Link (PDF 3.2m/b)

Dear Reader

The world watches as Greek politicians build themselves up into a frenzy ahead of Sunday's election, uttering contradictory statements with virtually every breath. For instance Tsipras of Syriza promises end to economic austerity AND that Greece will stay within the euro-zone. Meanwhile the leader of New Democracy warns that this could be Greece's last election!

However the problem the euro-zone faces is not really about the Greek economy going bust, instead it has always been about the contagion consequences for the rest of the Euro-zone that Greece risks triggering, all the way from tiny Cyprus to the giants of Italy and even France. A Greece exit would change the dynamics of the single currency by setting a precedent that virtually guarantees that the Euro-zone currency would fall apart as each country is targeted one after another for the fundamental reason that without competitive devaluations between countries they are destined to go bankrupt as they cannot compete against Germany.

For this we are seeing signs in the credit markets response to the Euro 100 billion Spanish bank bailout by pushing up the Spain's borrowing costs to Euro-zone record highs of over 7% from 6.5% pre-bailout because the market realised that all it will do is to pile more debt onto the backs of Spanish tax payers as well as increasing the actual risk of default because the Euro 100 billion will have no positive economic consequences for Spain, but is purely to delay Spain's ever expanding debt mountain from toppling over i.e. keep Spanish banks liquid whilst insolvent.

The bottom line remains, regardless of whatever the politicians state Spain and Portugal WILL leave the euro-zone within 6 months of Greece leaving because of the fundamental flaw in the euro-zone where countries are unable to competitively devalue against one another which ensures ever increasing perpetual austerity.

Central Banks Response to Greece Eurogeddon

All week we have seen emerging signs and announcements that Central banks are preparing the way for a wall of electronically money printing in an attempt to drown out the eurogeddon firestorm with ever expanding waves of liquidity, such as UK measures announced on Friday that the Bank of England will give cheap money to the banks to enable them to provide credit to the wider economy. Off course the reason offered is just smoke and mirrors propaganda, the real reason is for the Bank of England to yet again stuff every orifice of the UK banks with tax payer cash (where ultimate liability lies) ahead Eurogeddon Monday following outcome of Sundays Greek election.

This £140 billion of liquidity for the banks will soon mushroom ever higher to whatever is required to prevent a run on the banks, so I could pluck a figure out the air such as £300 billion as the Eurogeddon cost to the UK for once the dust has settled.

Eurogeddon Good News for the Markets?

Whilst the mainstream press is fully focused ont he potential dire consequences of Grexit following the Sunday Greek elections. However, as I wrote on the 4th of June at length that eurogeddon would be good news for markets where many of the adverse market trends that had been in force for several months were expected to start to reverse ahead of the dissipation of uncertainty which the Greek elections are a clear marker of.

Whilst the lead up to Financial Armageddon is resulting in much pain for investors and traders alike. However, my expectation's are for the majority of observed trends to start reversing as the Financial Armageddon uncertainty starts to dissipate, so in a way Financial Armageddon would be GOOD for the markets because markets DISCOUNT THE FUTURE (and the future is INFLATIONARY), and the problem we have in the lead up to the present is that the future has INCREASINGLY been UNCERTAIN. In such a climate of increasing uncertainty, markets increasingly discount even greater FUTURE UNCERTAINTIES in a sort of feed back loop, and hence you have what we have seen in the stock and commodity markets, coupled with the flight of funds into bankrupt money printing nation bonds such as the USA and UK.

Therefore No matter what the actual outcome is, and how bad the mainstream press will paint it as, as a total disaster, know this that once future uncertainty starts to dissipate then we will tend to see a reversal in the majority of the trends that have been in force for the past few months, i.e. markets such as stocks, commodities and Euro should rally and markets such as US and UK, bonds, dollar and sterling fall.

Now some 12 days on market trend reversals have started to manifest themselves from the stocks, commodities and even all the way to the forex markets where there are clear technical signs of a reversal in the works for the Euro against the Dollar. Off course eurogeddon by it's nature will induce market volatility. The big question mark is at what point will the markets react to DISCOUNT future Central bank money printing actions that will inflate asset prices such as the Bank of England's announcement Friday, so ironically eurogeddon may either only see a very brief negative market reaction or even that the market on Monday moves higher from the outset, which will surely catch many traders exposed to overwhelming doom and gloom off guard.

For more in depth analysis of Euro-zone Financial Armageddon and see the following recent articles:

Fundamental Inflationary Background

The fundamental background is that of the world markets about to be exposed to another wave of highly inflationary central bank money printing liquidity. I have covered at length over the past few years to explain why deflationists are wrong in their mantra of debt deleveraging deflation that only really exists in their theoretical models, despite REAL and ongoing inflation, the usual suspects from the mainstream press right through to the BlogosFear still continue pounding away at the non existant Deflation argument, despite the fact that even countries such as Greece that have been in economic meltdown have suffered INFLATION (Greece 10% Inflation over the past 3 years).

Pause there for a moment and think about that. Greece has had 10% INFLATION Whilst its economy has collapsed by more than 16%, whilst average workers wages have collapsed by more than 20%. Greece illustrates the difference between the REAL world and THEORY!

I have explained this countless times that the destruction of Supply is greater than the destruction of demand because people who lose their jobs do not stop consuming, and this consumption is financed via debt, deficits and sale of assets which is why Greece has Inflation which is why There Won't be DEFLATION.

Deflationists Really Are Fools

Bluntly, they just don't get! This is the problem when people follow academia, follow theory of what should happen, for academics are good at only one thing which is to write reams and reams of text that drowns out market logic.

Deflationists such as Krugman and his disciples bang on and on about deflation, about destruction of demand, that will result in deflation, about debt deleveraging that will result in deflation. What the deflation fools remain blind to is the fact that the central banks such as the Fed, and the Bank of England have been stuffing every orifice of the deleveraging banks with free money which results in artificial profits as the banks risks / debts are being systematically transferred to the central banks balance sheets. Which is WHY FALLING DEMAND and FALLING WAGES are NOT resulting in Deflation! because in totality, there HAS BEEN NO DEBT DELEVERAGING, TOTAL DEBT IN FACT CONTINUES TO EXPAND as central banks MONETIZE GOVERNMENT DEBT and in some cases EXPOENENTIALLY. And not only that but money printing AKA QE is far worse for an economy than Debt money (bank created credit) because it REALLY has just been conjured out of thin air with no economic activity to justify its creation.

This is why asset prices WILL rise, ALL prices including assets because of central bank QE which should not just be seen as free money for the banks but direct deliberate debasement of the currency. Unlike bank credit It WILL NEVER be destroyed instead feeds the Inflation Mega-trend which I termed in March 2009 as QE really being Quantitative Inflation.

I know this may be getting rather complicated, so if you want to understand only one thing, know this that money printing by central banks is highly inflationary, highly corrosive to the purchasing power of a currency, which is why despite all of the academic reasons why we 'should' have deflation in reality we have INFLATION.

So I will leave the deflation fools to keep crying Deflation all the way to HYPERINFLATION, and even then they will say they were right because AFTER deflation supposedly comes Hyperinflation, despite the fact there never was ANY Deflation, not even for bankrupt Greece.

So fundamentally we remain immersed in an EXPONENTIAL INFLATION MEGA-TREND. Maybe some day the highly vocal deflationistas' such as Mish will be ready to take the red pill, but for now they continue to exist in an imaginary deflationary world that is blind to the severe consequences of central bank money printing.

It's not demand that's being destroyed its the currency! Which is why consumer and asset prices rise because central banks cannot print the likes of gold, and consumer goods, but instead print the money to finance government debt and deficits.

Stock Market 2012 First Half Strategy

As regularly indicated since Mid December 2011, in view of expectations for a tough year for a maturing stocks bull market during 2012, my strategy for the first half of 2012 had been to cut my net long exposure to the stock market from about 40% of assets (Dec 18th) by selling into a rally into late April / Early May 2012 as indicated by my last stocks analysis and forecast of Feb 2012, which has resulted in cutting my exposure to the stock market to about 8% as of last my in-depth analysis of a couple of weeks ago.

Stocks Stealth Overall Bull Market Investing Strategy

The over-riding bull market strategy since the birth of the bull market in March 2009 has been pretty simple, which is that the greater the deviation from the preceding High then the greater the buying opportunity it presents, as the bull market should ultimately resolve to new highs.

Therefore the primary purpose of this analysis is to determine if the recent sell off and subsequent rally is likely to target a trend to new bull market highs over the next month or so.

Market Sentiment - Market sentiment is usually in synch with the mainstream media, which at this point in time should suggest that it is at its most bearish in the face of an imminent eurogeddon event.

However the short-term rally that has taken place over the past 2 weeks is contrary to the mainstream media noise, on face value this either implies that the market is discounting resolution of uncertainty or that the market is buying to sell on the news.

In terms forecasting trend, it would have been much better for the market to be falling going into the Greece election as that would better sow the seeds for a stronger market reversal. Having a Dow 700 point rally going into eurogeddon actually weakens the markets short-term prospects.

Stock Market Volatility - VIX

The fear in the media is not being matched by fear in the stock market. The VIX is not indicating much panic or fear in the market. It's actual rising trend is pretty moderate given that we stand on the eve of eurogeddon. This is not the pattern I would expect in advance of a market getting ready for a big move higher. In fact given that the VIX is trending higher, to me the VIX is suggesting that a FALL in the stock market is more probable than a rise.

Stock Market Trend Shows Weakness Against Forecast

My last forecast for the stock market of 21st Feb 2012, expected stocks to correct into early March before rallying to a new bull market high by late April / Early May ahead of a significant correction in May as indicated by the original forecast graph below:

Whilst the overall trend trajectory was inline with expectation's in offering significant rallies to sell into following an early March low and a late April / Early May high ahead of a significant May correction. However as the below Dow chart indicates, the stock market showed significant weakness against the forecast high of Dow 14k, which warned of even weaker price action than expected for May.

Whilst the big picture is that of a continuing trend higher to Dow 14k at which point the Dow can be expected to experience significant resistance as it approaches a new all time high the subsequent trend for which will become much clearer by that time but which currently implies a significant correction is likely during May which matches both the seasonal tendency (sell in may and go away) as well as likely approaching the finale to the Greek Tragedy (markets act before the event) namely exit from the euro-zone and a deepening Euro-zone recession. This supports the very long-term technical analysis which currently implies it will take some time for the Dow to break and hold to a new all time high.

Therefore the subsequent May sell off has been far more severe which included the important break of the Wave 4 low, the implications of which I will cover next.

Elliott Wave Theory - The EW count has remained remarkably stable and continues to play out pretty much as expected as of December 2011 for a 5th wave to terminate in late April / Early May and followed by a strong correction back towards Dow 12k as stated in Feb 2012.

The EW picture continues to play out as of last analysis of 18th Dec 2012 with the current Wave being a Wave 3, that is likely to imminently resolve in a Wave 4 correction that implies it will be followed by an Impulse Wave 5 that could carry the Dow to 14k. This suggests a short-lived correction, to be followed by a trend higher into late April / early May. This also implies that when the 5th wave terminates something far nastier is in store for the stock market which at this point implies an ABC correction back down towards Dow 12k.

Key Points

1. The fifth wave peak as mentioned earlier was far weaker than expected.

2. The subsequent May correction whilst fulfilling my target of Dow 12k, however does not match that for an corrective ABC pattern but appears Impulse in nature. This suggests to me that we are in a larger ABC corrective pattern which implies that the current rally is corrective and likely to resolve in the Dow revisiting the 12k level.

The bottom line is that this analysis confirms what I suspected back in February 2012 that the early may peak would resolve in a move that would seek to correct the whole rally from October 2011, which requires a significant overall downtrend both in terms of time and price. The subsequent weakness in the Wave 5 peak suggests that a break below Dow 12k is probable.

MACD - The MACD is looking pretty positive for the stock market, having turned higher from an oversold level, suggests that the stock market should be supported going forward.

Price Patterns - The double top price pattern measures to 12,000. Which implies that either the low is in, or that any further downside is very limited, which raises the possibility that another bout of selling may result in a double bottom.

Trend Analysis - The current rally has cleared the down trendline off of the last high which is positive. In terms of trendline support lies at a fairly distant 12,250 which therefore puts a significant buffer under the stock. The Dow is at significant resistance area coinciding with previous lows around 12,750. The next resistance lies at 13,250. Whilst support lies at 12,300 and 12000, then 11,700. So basically the Dow is currently near the middle of a trading range of between 13,250 and 12,000. Given that the current trend is a reversal rally which suggests a test of the low is probable.

Stock Market Trend Forecast Conclusion

This analysis is resolving towards a picture that is not as bullish as I thought it would be given that we have already had a correction, and are in a rally going into eurogeddon. However nor is it as dire as it could also have been.

The key point is that the long waited for Greek Tragedy has finally arrived which will result in much dissipation of uncertainty as I wrote in Feb 2012 -

A significant correction is likely during May which matches both the seasonal tendency (sell in may and go away) as well as likely approaching the finale to the Greek Tragedy (markets act before the event) namely exit from the euro-zone and a deepening Euro-zone recession. This supports the very long-term technical analysis which currently implies it will take some time for the Dow to break and hold to a new all time high.

The big picture remains exactly as above in that it will take the Dow some time to break and hold onto new all time highs.

In terms of a forecast trend, this analysis resolves towards an imminent trend to test and possible break of the recent low of 12,035. How far will the break go ? It could trade all the way down to 11,700, but given that the Dow put in a double top, probability favours a double bottom. The bottom it puts in should be firm enough to propel the Dow towards the upper end of the range as the below trend forecast graph concludes:

My strategy - I see a couple of range trading opportunities over the next month or so. However, I am not seeing any real reason to start accumulating much stock in terms of long term investments, perhaps lift my holding to 10% of assets (net long) on the next sell off, because there is no clear evidence that the stock market looks set to break out of this trading range so it's not appealing in terms of risk vs reward. I will wait to see whether the stock market shows relative strength or weakness against this forecast trend. A stronger market will encourage me to accumulate.

Your analyst who will probably regret not waiting until AFTER Drachmageddon before doing this analysis and forecast.

Source and Comments: http://www.marketoracle.co.uk/Article35176.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2012 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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The Market Oracle is a FREE Financial Markets Forecasting & Analysis Newsletter and online publication.
(c) 2005-2012 MarketOracle.co.uk (Market Oracle Ltd) - The Market Oracle asserts copyright on all articles authored by our editorial team. Any and all information provided within this newsletter is for general information purposes only and Market Oracle do not warrant the accuracy, timeliness or suitability of any information provided in this newsletter. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We recommend that independent professional advice is obtained before you make any investment or trading decisions. ( Market Oracle Ltd , Registered in England and Wales, Company no 6387055. Registered office: International House, 124 Cromwell Road, Kensington, London, SW7 4ET, UK )

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Friday 15 June 2012

U.S. Stock Market Analysis and Forecasts Free Access

The Market Oracle Newsletter
June 15th , 2012            Issue #9 Vol. 6

Commodities Currencies Economics Housing Market Interest Rates Education Personal Finance Stocks / Financials Real Gems

U.S. Stock Market Analysis and Forecasts Free Access

 

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Tuesday 5 June 2012

Euro-zone Galloping Towards Financial Armageddon

The Market Oracle Newsletter
June 4th , 2012            Issue #8 Vol. 6

Commodities Currencies Economics Housing Market Interest Rates Education Personal Finance Stocks / Financials Real Gems

Euro-zone Galloping Towards Financial Armageddon, Greece Will Take Third World Europe to Inflation Hell!

Stocks Stealth Bull Market 2011 Ebook Direct Download Link (PDF 2.8m/b)

Interest Rate Mega-Trend Ebook Direct Download Link (PDF 2.3m/b)

Inflation Mega-Trend Ebook Direct Download Link (PDF 3.2m/b)

Dear Reader

 

Can you smell it ? There's PANIC in the Air!

For instance, apparently Britain is preparing immigration controls for an anticipated flood of refugees from Third World Europe as warns Home Secretary, Theresa May "work is ongoing to deal with large movements of people in the event of the break-up of the single currency". Though these trends have been in force for the duration of the financial crisis that has resulted in net migration of more than 250k per year as I have periodically commented upon as to why the governments forecasts for UK unemployment to FALL were never going to materialise, as workers (especially the young) from across the bankrupting Euro-zone would see Britain as a jobs safe-haven outside of the Euro-zone and that was some 2 years ago!, which the mainstream with the benefit of hindsight has only recently been picking up on.

01 Jul 2010 - UK Unemployment Forecast 2010 to 2015

The clear conclusion is that despite economic recovery underway, UK unemployment looks set to remain on an upward trajectory for the next 3 years, after which it should feel the effects of the election boom. However against these positives there will be the impact of European Migrant workers that could take up as much as 70% of the new jobs created, which suggests that even if the government is able to create its forecast 2.5 million jobs (which I doubt), then at least 60% of these jobs will go to migrant workers, leaving less than 1 million new UK jobs for British citizens. This does not paint a very rosy picture for the governments expectations for UK unemployment to fall to below 2 million.

Final conclusion - UK unemployment looks set to gradually rise to a peak of just over 2.9 million by mid 2013 before stabilising and starting to decline into a May 2015 General Election of just below 2.7 million against the governments forecast for UK unemployment to fall to 2 million by 2015 (OFBR - Peak at 8.1% this year before falling to 6.1%).

Now, the British government having realised that the opposite has subsequently transpired is panicking as it see's the potential flood (already underway) of eager willing unemployed workers from across the Euro-zone with near zero prospects for employment in their home countries (PIIGS typical have young unemployment rates of 50%!) are abandoning third world Europe for the easy to get to promised land of Britain.

Financial Armageddon is Detonating Across Europe

Whilst the financial mushroom cloud towers over Greece's economy as it prepares for an inevitable GrExit. However the rest of euro-zone has far more to fear than from just a Greek radioactive financial fallout cloud because many of the euro-zone countries have already FLASHED Financial Armageddon detonations themselves that encompasses most of the Euro-zones 330 million population.

So it is no wonder that Britain's Home Office is in panicking for all of these 330 million peoples have the automatic right to travel and work within the UK.

So what is the Home Office planning ?

Even just a couple of percent from the 200 million (4 million persons) or so from third world europe would be enough to break Britain's economic and social back thus near instantly evaporating much of Britain's safe haven status and putting Britain firmly in the same boat as any one of the PIIGS for the reality is that Britain's Weapons of Mass Financial Destruction, it's BANKS are several orders of magnitude greater in mega tonnage of damage that they could inflict not just on Britain, not just on Europe, but the whole of the global financial system.

How would the FREEZING of Britain's Borders take place?

It would first start under the banner of the Home Office unable to process visitors thus border delays running first from hours, then into days and then weeks. We have already seen the Home Office test this border freeze.

The next step would be to back up the operational freeze with full parliamentary backing. And the only way this would work is if the British Government were already planning to SUSPEND its membership of the EU! That is the logic conclusion, however the problem is that Britain's safe haven status may not survive a suspension of its membership of the E.U. So Britain (like most of europe) potentially faces a lose, lose situation.

So, yes there IS PANIC in the air!

This is my third in the current series of articles on Euro collapse, so rather than repeat what I have already written, please refer to the following for key elements.

Part 1 - 08 May 2012 - France and Greece Voters Reject Austerity for Money Printing Inflation Stealth Debt Default

Following the result of the French and Greece elections, which that led to the conclusion that Greece would exit or be thrown out of the Eurozone.

Part 2 - 12 May 2012 - Greece Exit, Euro-Zone Collapse, Spain and Portugal Will Follow Within 6 Months

Covered the reasons why Greece had no choice but the exit and the consequences for bank depositors and key steps people should take to protect themselves from the consequences of Financial Armageddon, as my expectations are for Spain and Portugal to follow a Grexit within 6 months.

Summary of Existing Conclusions

1. Greece will exit the Euro-zone, and sooner rather than later.

2. Spain and Portugal will exit within 6 months of Greece leaving.

3. There is an accelerating euro-zone wide bank run underway the price of which will mainly be born by Germany as the Bundesbank is effectively covering bank deposits of all euro-zone banks so as to prevent a total collapse of the euro-zones financial system.

BRITAIN IS THE ULTIMATE LEHMAN's!

Whilst many (especially in the mainstream press) may have already discounted the rhetoric from the Home office on Immigration controls, however they have failed to realise exactly how high the stakes are. The stakes are this - Britain flipping from being a safe haven to being perceived as being a Greece in a matter of days, for the markets would NOT give 2 years or so that they have given the Euro-zone crisis to play out, because when one does the sums one can see that Britain is just as bankrupt as Greece! And it would not take much to make the smoke dissipate and the mirrors to crack. The facts are Britain's total debt and liabilities are above 500% of GDP, Britain's austerity is a joke, for there has been NO real austerity which is why the budget deficit continues trundling along at £120-£130 billion PER YEAR!

We see the crisis in Britain when we see demonstrators on the street demonstrating against bogus austerity, we see the crisis in Britain in a weak government that does U-Turn's on economic policy on virtually a DAILY basis. The only thing Britain has is its electronic money printing presses without which Britain would have collapsed 3 years ago! Whilst the euro-zone looks to Germany for Bailouts, Britain looks to the Bank of England to print money, to date Britain has bailed itself out to the tune of £325 billion, which is why instead of the deflation that vested interests and academics regurgitate at length we have had inflation of over 15%.

Delusional Deflationists

You don't have to go far to see that the mainstream press and blogosfear remains populated with delusional deflationists, devoid of market sense that are in a perpetual state of denial to the INFLATION that has followed the great recession of 2008-2009. They MIS-INTERPRET the continuing Low bond yields for the likes of US, UK and German bonds amongst many non PIIGS nations as evidence for Deflation when common "market" sense dictates that ALL of these BELOW inflation rates are as a consequence of monetization of their respective country deficits and debts (accept Germany where it is the trade surplus).

The UK is a prime example of this with an unbelievable bond yield of just 1.50% which is HALF the UK's official Inflation rate! Are these fools saying 3% INFLATION (and it has been as high as 5%) is DEFLATION?

An even greater example of the Deflation Delusion as iterated by those devoid of any market sense is the example of GREECE, where despite economic meltdown of more than 16%, Greece at the same time has suffered INFLATION of about 10% over the past 3 years!

If Greece had the ability to print money than Inflation would have been near 100%! Which ordinary Greeks fully understand which is why they are desperate to remain within the euro-zone to protect themselves from the Inflation Hell that their corrupt politicians would unleash. How do book peddling academics explain that ? They can't! Instead they ignore it and continue merrily along their way spouting utter claptrap based on theories which NEVER match the REAL WORLD! Which is why economics as you know it and as you read and watch it on the news programme's is nothing more than government propaganda, economics is nothing more than pure government propaganda. And all that academics do is to regurgitate what the propaganda schools of thought state. It's as if they say it for long enough then people will become blind to the REAL WORLD! Maybe most people HAVE been brainwashed to believe that they are experiencing deflation despite the reality of their grocery bills rising by near 10% per annum!

What the academics FAIL to understand as I have been writing of for several years as to why we will have an INFLATION MEGA-TREND is because Economic Recessions, Depressions and Meltdowns result in the destruction of SUPPLY that is GREATER than the destruction of DEMAND!

Market Sense dictates that when people lose their jobs, even though they no longer produce anything, they do still CONSUME heating, eating and the rest of ongoing activities that are funded by debt and deficits and sale of assets. So whilst production reduces but in many respects consumption goes on resulting in INFLATION, because no matter what the governments call it they are effectively printing money to finance the ongoing consumption of the increasing number of un-productive persons.

You WILL NOT FIND That Economic REALITY anywhere in Academia, it is beyond the comprehension of economic theory. Instead crackpot Keynesian's believe even more money should be borrowed and spent on unproductive activities that ultimately accelerates the trend towards bankruptcy.

Keynesian Vested Interests Put Theory Before Logic

The Keynesian answer to the debt crisis is to borrow even more money and spend your way out of the crisis by GROWING the size of the state. There is no logic to Keynesianism, because you cannot borrow and spend your way out of debt crisis! All it results in is INFLATION. Which is the primary tool for governments to buy votes, i.e. print money or debt and buy votes at the next election the consequences of which is INFLATION.

The problem is this and it is relatively simple. The problem is that the real reason there is an ongoing debt crisis is because the State is too big. And what the Keynesian's are advocating would make the state even larger when the answer is the exact opposite which is to SHRINK the STATE. That is what you need to do to get out of a perpetual all consuming debt crisis.

Perhaps many years from now with the benefit of hindsight we will see professors such as Krugman looking in their rear view mirror to explain what came to pass in our time, but for now theory dictates we should have deflation and therefore Keynesian policies on how to deal with it are in play the world over as official economic doctrine because Keynesian economists (all academic economists) are vested interests who are PAID to follow a school of thought without which they would be literally UNEMPLOYABLE!

ALL THEORY AND NO PRACTICAL EXPERIENCE.

Such theory based economic propaganda was most recently demonstrated by Mervyn King, the governor of the Bank of England who effectively blamed the euro-zone for HIS failure to keep UK inflation at 2%.

"We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country's history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.

"The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2% strikes me as wholly unrealistic,"

When the real reason for high UK inflation is because of the £325 billion of money printed to date by the Bank of England for the banks to buy government debt and thus kill two birds with one inflationary stone (monetize government debt and generate artificial profits for the bankrupt banks), and despite what the MPC committee states in its minutes, THEY WILL PRINT MORE, and sooner than most can imagine, because as I wrote several years ago now, the more Quantitative Inflation a government instigates then the more it will have to print in the future because the economy becomes addicted QE or more accurately QI all the way towards a high or even an hyperinflationary panic event!

For instance it now takes the UK economy being in recession for the Inflation rate to fall back to the Bank of England's UPPER maximum limit! That shows you an economy that drug addict style has become addicted to QE, so when they say they are going to stop QE, in reality they cannot until the deficits cease to exist. But QE has the effect of delaying deficit reduction pain and hence why the UK is in an INFLATIONARY DEPRESSION.

United States Deflation ?

A bad set of unemployment figures Friday has prompted the usual suspects to start crowing loudly again about the Deflation threat. However the below CPI graph reveals the truth about so called US Deflation.

The facts are that even on the official figures the US has experienced Inflation of nearly 10% over the past 3 years, with the trend trajectory little different to that which preceded the Great Recession of 2008-2009, whilst shadow stats implies its near 10% per annum. The Deflationist's only tend to refer to CPI whenever it dips to start warning that Deflation is imminent (search Google), which tends to occur just prior to its next acceleration higher, just as we have been witnessing since the start of the year that CPI right on cue is accelerating higher despite a slowdown in the US Economy, which is basically for very similar reasons to Britain being in an money printing induced Inflationary Depression.

Inflation or Deflation Matters

There are many that say (usually the ones who are consistently wrong) that it does not matter if we have Inflation or Deflation, when I know from my experience that Inflation or Deflation is the most important economic factor, because everything ELSE in the economy and markets is LEVERAGED to Inflation. So in my opinion those that say it does not matter have NEVER traded or invested for any significant length of time, for if they had they would see the impact that the Inflation trend has on markets and economies which is why it remains my primary economic indicator to attempt to map out several years forward, I don't do all this work on Inflation for fun, I do it because it gives me an edge. Also it is no coincidence that controlling Inflation is the primary remit of virtually EVERY central bank, even if as a result of failure they try to hide the real rate of inflation from their general populations.

The bottom line is this that Governments need inflation to survive, so they will never allow Deflation to persist and they have the money printing presses to ensure there will NEVER be a persistent trend for Deflation, which is why even Bankrupt economic meltdown Greece of today has Inflation, as I wrote in the intro to the Inflation Mega-trend Ebook well over 2 years ago (Free Download).

"The worlds economies swim in an ocean of inflation that is punctuated by occasional ripples of deflation which is illustrated by the perpetual upward curve of general prices as measured by the Consumer Price Index (CPI). Inflation in the long-run impacts on virtually all commodities and asset prices. "

Europe's Crisis is Not about Debt but Currency

We are all repeatedly told at length by the mainstream media how the euro-zone could collapse as a consequence of the euro-zone debt crisis. However the crisis is not primarily about debt but about currency. The EURO IS the reason for the debt crisis and not the other way around as is the consensus view. This flipping of mainstream economic reality may be difficult to grasp at first, but contemplate this - Only ONE country in the Euro-zone has a currency and that country is Germany because effectively only Germany can print euro's. Therefore none of the other countries have a currency, they are ALL effectively using Deutschmark's, because it is Germany which stands behind the Euro as we know it today. This currency crisis is a re-run of the Euro's predecessor the ERM, which collapsed in spectacular style during the early 1990's as a consequence of over valued exchange rates that did not reflect individual economic realities which is precisely where we stand today. The economies of Greece and the rest of the euro-zone are OVER VALUED against one another and most importantly Germany, and because they have no currency they cannot devalue and inflate away their current state of over-valuations, instead the ECB (Bundesbank) prints euros to delay their bankruptcies because the Euro ensures there IS NO MECHANISM for correcting the imbalances and thus the only outcome is economic collapse.

This is why there are only TWO solutions to the Euro-zone crisis

1. Germany to exit the Euro-zone. though I think it is too late for this option. I first mentioned this in May 2010, so 2 years of euro-zone dithering has made this solution now far less effective and probably would no longer work, the trends in motion are now too severe for a Euro-zone less Germany to survive.

2. For the Euro-zone to breakup. This is the most probable outcome and will likely happen in stages (or so the politicians hope), with Greece first then Portugal and Spain and others as also covered in Part2. Though the risk of financial armageddon, a fast pace total collapse is pretty high.

The current situation that the politicians are hell bent on sticking to is UNSUSTAINABLE. Because Euro-zone EXIT beckons for ALL Member states!

Greece Leads the Way - "You Give us 100's of Billions of Euro's or We All Go to Hell Together"

Greece is burning through about 100 billion euros a year just to delay bankruptcy, not prevent it. The Greek elections illustrate that the people have no power, they can elect whomever they choose but because they do not have their own currency the governments have no power to do anything.

This lack of political power is shown in the opinion polls, where Greeks vote overwhelming for an end to austerity but at the same time vote to stay in the Euro. The facts are that they cannot end austerity and stay in the Euro. This contradiction is being played out in the run up to the next Greek election where Sypris is expected to form the next government and it has built it's whole election run on the basis of this contradiction which is for an end to austerity but remain in the Euro-zone. Effectively Greece IS black mailing Germany to the effect that they want Germany to bankrupt itself so that the Greeks can return to living beyond the countries means whilst enjoying the security of the Euro in terms of retaining purchasing power.

The bottom line is that the mass of Greeks who buy into Sypris are delusional if they think that Germany will bankrupt itself for Greece.

Greece today is several orders of magnitude more bankrupt than it were 2 years ago when the credit markets first closed their doors to Greece. In the meantime all that has happened is that several hundreds of billions of Euro's have been flushed down the toilet as the price paid for delaying collapse of the euro-zone, and even if Greeks vote for austerity rather than Sypris then they will STILL eventually leave the Euro-zone because of the facts mentioned earlier that there is no mechanism within the euro-zone for correcting imbalances between member states.

Greeks need to understand one fundamental fact and that is that THEY WILL LEAVE the Euro-zone no matter if they chose to or not! The decision is NOT their's to make!

As mentioned in Part 2 - The expected Sypris Government, will come to be seen as those responsible for Greece's exit from the euro-zone and national bankruptcy and by virtue of the consequences of which will probably come to be seen as one of the most hated governments in Greece's long history. It will mark the end of Sypris and much of the left along with it as Greece will likely lurch to the far right for solutions from high if not outright hyper-inflationary collapse that will follow.

When Will Greece Exit the Eurozone?

The clear date in mind of most is following the results of the 17th June 2012 election. My view remains that on its own a Greek exit could still be inline with that which I mapped out in Part2, namely following a series of summits in July and August. However, the problem is that the decision could be taken out of the Euro-zone politicians hands as a consequence of other countries entering crisis point (Spain) forcing the issue. So whilst the schedule may point towards an late August / Early September exit, euro-zone reality dictates you should be ready for a high probability of a Greek exit within a matter of days of the 17th June election.

Euro-zone Exit Only Solution for Greece

Many commentators correctly state that Greek debt is denominated in Euro's so a return to the Drachma would not help Greece as the debt burden would be even higher. Whilst technically correct, however, they are wrong in this assumption because of the fact that countries that have their own currencies can choose to do anything they want to. They can choose to default on the debt regardless and not pay any or perhaps a penny on the euro.

Off course what will actually happen is that the ECB will take on most of the debt that Euro-zone banks are still exposed to prevent bankruptcy of the Euro-zone whilst at the same time cover the losses of other Euro-zone central banks because they cannot print money so in effect Germany will pay a price of at least Euro 300 billion for just Greece exiting the Euro-zone.

V Shaped Economic Recovery Following Greece Exit?

Greece with its debt slate wiped clean (by default) and its own currency to print to infinite extent will experience severe pain for the first year or so then barring social collapse should experience a sharp economic rebound as a consequence of no longer having a debt burden to finance, off course the credit markets will remain closed for many years, and the purchasing power of the Drachma will have collapsed so the economic recovery in real terms will be pretty artificial but at least it will make Greeks start to feel better for the future as economic data such as unemployment starts to improve (helped by the fact that hundreds of thousands of unemployed Greeks will have migrated elsewhere).

This extensive article continues at the Market Oracle site - The Pain in Spain Flashes Financial Armageddon, Inflation Wars

Source and Comments:http://www.marketoracle.co.uk/Article34977.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2012 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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