The Big Fall Harder


–If you missed it on the weekend, do yourself a favour and go watch Murray’s 10-minute market update at his YouTube Channel. You’ll need headphones or speakers to listen in. But in light of this weekend’s inconclusive negotiations over Greek debt, Murray’s technical take on the market is pretty illuminating.

–In fact, we reckon the bickering between European finance ministers over how much to lend to Greece is going to lead to a fulfilment of Murray’s forecast: a break to 1220 on the S&P 500. Murray also showed a chart we hadn’t seen before. It shows how far above or below the ASX/200 is from its 35-day moving average, in percentage terms. Most of the time it’s hardly ever 5% higher or 5% lower than its 35-day moving average.

–But when the short-term trading action sends it more than 5% below its 35-day moving average, you often see a big fall in the market. Murray reckons if we get one now, it could lead to a quick retreat to 4,200 on the ASX/200. Since most of the buying in the last two years is out of the money already, that’s the kind of decline that could lead to some capitulation.

–It’s a pretty risky time to go short, too. When you’re at the bottom of the price distribution in an index or security, the chance for a “false break”—a testing of the low before sudden reversal upward—is high. For example, Murray reckons an S&P decline to 1220 is bullish, at least for short-term traders.

–Your editor confesses that the language of the technical analyst sounds just as foreign as Greek. But it’s a different perspective on markets. And we’ve agreed with Murray that the best way to show investors how you can use technical analysis to improve your trading or investing is to just…show them. His presentations don’t include analysis of any of his open trades—the trades derived from the overall market analysis. But they will at least show you how he analyses the market to generate trading ideas.

–Your editor prefers to view the markets as a great human drama. As Dr. Zapataka used to remind us, all great stories are family stories. Right now, the family of Europe is very unhappy with wayward son, Greece. Will Greece be kicked out of Europe’s monetary family?

–It hasn’t come to that, yet. And to be fair, it’s hard to see who is conning who in Greece right now. Greek politicians want to avoid agreeing to any more austerity demands—although why anyone would actually want the job of a Greek politician now is a good question. European bankers want to lend Greece money before it runs out, but don’t want to deal with the more fundamental long-term issue: that Greece is insolvent.

–Because if Greece is insolvent and the European banking system is suffused with Greek debt (and lots of other sovereign debt), then Europe’s banking system is under-capitalised. It’s hard to have sound money when your banking system is full of debt.

–There are a couple of home truths emerging from Europe and now being priced in to the markets. First, some countries are simply not going to be able to pay their debts. Second, you can call this a soft default or a hard default, but it’s a default either way. Third, the bond market is being replaced as the biggest government creditor by the taxpayer. This point is worth exploring a bit more.

–Since the Bank of England became the official creditor of the British Government in 1694, governments have always been able to count on financing from bond markets. Major banks and institutional investors have always been happy to finance the Warfare/Welfare State. The main reason is that the State, as a borrower, has a nearly inexhaustible form of collateral: the taxpayer. It’s the taxpayer that guarantees interest payments on government debt will always be met, and principal always repaid.

–The arrangement between the Welfare/Warfare State and its financiers has been pretty cosy for the last three hundred years. You had a system of “perpetual debt” enabling a permanent war by the State against: other States, methods of conflict (like terrorism), drugs, alcohol, smoking, fat and lately, the colourless, odourless gas otherwise known as carbon dioxide.

–By the way, at the domestic level, all of these wars are designed to generate more taxes. More taxes make it possible to borrow more, and fight more wars. It’s the ceaseless expansion of the government into private and public life—a relatively new phenomenon that’s been so long in escalating that we hardly notice how pervasive, intrusive, and insistent it has become.

–The key element to all of this is that the private sector is the willing buyer of public debt. And that is exactly what is ceasing to be true in Greece right now. And if it’s true in Greece, it may soon be true in Spain, Ireland, Italy and Portugal. And if private creditors no longer willingly fund the debt of the State in Europe, Europe has a real systemic problem.

–You have to give credit to the private sector in Europe (mostly the banks).  All the risk of buying Greek bonds or loaning money to the Greek government that’s taken by the European Central Bank and the IMF is really a risk for the taxpayer. Existing holders of Greek debt, the banks and private sector creditors (or the Money Power), are being given a back-door bailout via the ECB and IMF support of Greece’s ongoing debts.

–Private sector creditors to Greece are making the familiar argument that they should not be allowed to take losses on their investment because those losses will cause bank failures throughout Europe. If they’re right—and we suspect they may be—it shows you how fragile Europe’s financial facade really is.

–And we don’t mean to pick on Europe. We could easily be picking on China or America, both of which have their own profound credit-related problems. But for now, all the focus is on Europe. Our advice is to be aware of the short-term possibilities and prepare for them.

–But in the longer term? The longer term is that every time the day of reckoning with bad debt is delayed, it makes the ultimate reckoning that much worse. The losses will be bigger. And the institutions that fail will be bigger too, including the State itself.

Dan Denning
Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. “It’s hard to have sound money when your banking system is full of debt.” Nobody wants sound money and there is no inducement for any particularly well endowed party to insist upon it. As long as a reckoning or mark to market can be kicked down the road “investors” (ie: hyperleveraged money market dealers on a guaranteed short term clip) can be found. If that is the case then Stiglitz has it right and all sovereign treasuries should always have sustainable low yields. With people of consequence (including BRIC sovereigns) having so little inducement to mark their own balance sheets to market it takes alot to to tip it over into a fear that would make the call for real money behind liquidity (like 08). A lot doesn;t mean much by quantity, Iceland was almost enough, the bell only has to ring in virtually any sovereign to make it enough.

  2. “You have to give credit to the private sector in Europe (mostly the banks)”

    Boom tish.

  3. “And we don’t mean to pick on Europe”

    Europe is in big trouble. But IMO all of this talk of Europe really detracts from the larger issue of the US. It’s not like some miracle occurred and everything just got better overnight.

    Can we name even one thing that has turned around for the US and is now positive for their outlook? Unwillingness to increase the debt-ceiling doesn’t count, as that is just a political power-play by self-interested politicians.

    Aren’t we really just continually asking ourselves the question – who will go first? Europe or the US? (or China, depending on your perspective).

    Europe can bail itself out, to a degree. If the USD is determined as no longer the reserve currency, which can happen quickly, then the US will easily go down first.

  4. That’s funny, the same quote jumped out at me: “It’s hard to have sound money when your banking system is full of debt.”
    Gee Dan, that is kind of an obtuse statement for such a generally astute bloke like yourself to make. Sort of like making the observation that it’s hard to stay dry swimming in an ocean full of….water.
    I know that you know that our monetary system is by definition debt based, that our money is created as debt, and that banks are the source of this magical money – and therefore banks have always been full of debt.
    A bit further down, you make the following statement: “It’s the taxpayer that guarantees interest payments on government debt will always be met, and principal always repaid.”
    You got that one half right, but made a glaring error on the second part. The principal is NEVER repaid – it was never intended to be repaid! The brilliant idea is that the taxpayers are on the hook for perpetual interest payments on “money” that the banks create from thin air, in perpetually increasing amounts due to the fact that the overall debt (principal)is perpetually increasing (and therefore never repaid).
    Of course (and I know that you know this also), the problem is that the taxpayers CANNOT manage to meet perpetually increasing interest payments on the debt that the bankers foist on them via the bankers governmental servants… eventually the load becomes too great and the ponzi scheme collapses. Funny how the bankers- and most of their manifold corporate subsidiaries – come out smelling like roses every time their is another economic collaspe. Guess that has something to do with the fact that they OWN the goose that lays the golden eggs, eh?

    Stuart Davies
    June 22, 2011

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