Courtesy of ZH comes David Rosenberg:

Q: Isn’t this still a “modern-day depression?”

Sure it is. And just as we saw in 1933, 1934 and 1935, the economy and the stock market can experience a brief cyclical recovery, especially given all the massive monetary intervention by the central banks, but the fragility and vulnerability never go away, and neither does the hardship for many. Yes, yes, the stock market has doubled off the March 2009 lows. Yet, since that time, more than 11 million Americans have joined the food stamp program, including 4.4 million in 2011 alone. That may not fit into your definition of depression, but it does for these folks, I am sure.

The labour force has contracted by over 800,000 since the recession ended — this too is unprecedented. Assuming that the 200,000 payroll gain in December was the real deal, it would take 30 more of these to get employment back to where it was when the recession began four years ago. Real per capita personal disposable income in the U.S. has not grown for six years — despite trillions of dollars of government stimulus. If that’s not a ‘depression’ outcome, then please come forward with your definition.

If you exclude the mountain of government social benefits, real income on a per person basis has rolled all its way back to where it was in 2001! Interest rates have been 0% for over three years and governments around the world have blown their fiscal finances out of the water in order to save insolvent banks and save economic activity from implosion. In fact, as a result, there has been such a radical decline in creditworthiness coming out of the Great Recession, that the pool of sovereign bonds that have unblemished AAA ratings has plunged to $4.5 trillion from $16.9 trillion (see page C12 of last Thursday’s WSJ). That is a 73% nosedive and a reminder for investors that in the name of owning “scarcity”, high-quality paper is noteworthy for its dwindling supply.

Don’t bet only off Rosenberg’s words as you try to make money in the markets. However, bet off his words, with sound strategy thought out in advance that doesn’t require you to parse mountains of fundamental data, because how else are you going to produce profit in the climate he describes? Do I think trend following is a wise to bet for the chaos he describes? Yes, I do. And if you want to call me nonstop redundant–go for it–but I am not stopping.

Even if you could find a perfect fundamental explanation (or prediction) it doesn’t guarantee the ability to make money.

Think about it.

Saw an article at The Big Picture titled “About Those Eight Million ‘Lost” Jobs…” An excerpt that caught my eye:

In lieu of another asset bubble, maybe the nation ought to collectively lower its expectations about the labor market rather than harping about the unemployment rate all that time.

More:

But, now it seems pretty clear that we’ve run out of bubbles and maybe we should get used to the idea that the jobless rate will be high for a long time to come (think Europe) and that many of those eight million “lost” jobs were like that mid-2000s housing wealth — fleeting.

More:

These jobs weren’t “lost”, in the sense that they’ll somehow be found again, that is, unless Ben Bernanke inflates another asset bubble.

All true. A foundational view of my film.

It’s the end of the world [says Felix Zulauf in Barron's] as we know it (and I feel fine):

The members of the euro zone agreed in December that each country could have a structural deficit of no more than half a percent of GDP. If a deficit goes above 3% of GDP, the country will be sanctioned. This agreement now has to be ratified in all countries. But when you agree to such a prescription and you are uncompetitive, your currency is overvalued by 30%, you can’t devalue, and your nominal interest rates are too high, that is a recipe for a depression. It is a death sentence. Several countries won’t ratify the contract, and the next day their markets will be repriced accordingly. They will exit the euro, and the turmoil will go to the next level. Greece is bust in either case. If you can devalue your currency by 40% or 50% in that situation, at least you will have the chance to see the sun again and recover.

The banking system goes bust. Assume Greece won’t repay anything, or at most 10% of its total debt. It is not just the government but the private sector that is bust. That means banks in other countries will be in trouble, which means they will be nationalized. Governments won’t have the money to pay for this, so they will assume even more debt. That is the chain of events I expect in 2012, and if you believe it won’t affect the U.S. you are dreaming. The estimated notional value of the over-the-counter fixed-income-derivatives market in Europe is estimated to be about 60 trillion euros. There are many links to the U.S. banking system, although we don’t yet know who is positioned how. If one country exits the euro, all hell will break loose.

Every European country will be in recession in 2012, and probably in 2013.

Hat tip to pragcap.com.

My friend Cullen Roche has done a nice job of assembling the mother load of 2012 forecasts. What a fantastic resource for marginalizing the value of fundamental analysis. A nice counter to those lists?

“The illusion has been created that there is an explanation for everything with the primary task to find that explanation.”

“We decided that systematic trading was best. Fundamental trading gave me ulcers.”

More in Trend Commandments.

Some random happy reading across my desk today:

A Doomsday View of 2012
Things That Make You Go Hmm, Such As Looking Back At The Key Events Of… 2012
A Strategic Alpha Preview Of 2012: Hope And Expectations

Finally, Richard Russell offers:

At the close of the market on Dec. 23, Lowry’s Buying Power Index stood at 262 and their Selling Pressure Index stood at 434. This means that Selling pressure (supply) was 172 points above Buying Power (demand).

This is the posture of a bear market and not a bull market. It means that any sudden drop in Buying Power or a sudden rise in Selling Pressure can send the stock market spiraling down almost without notice. In other words, this market is walking on a tight rope and is in dangerous territory.

The news is now so confused and mixed that it is of little help to fundamentalists who trade on the news. Today, fundamentalists not only have to read and analyze events in the US, but they also have to keep an eye on both Europe and Asia. Moreover, as I’ve often said, markets don’t trade on today’s news, they trade on what the best minds see for tomorrow and next month or even next year.

Therefore, the intelligent position is to analyze the action of the market itself, rather than invest on the basis of news, and the market’s supposed reaction to the news.

The public is further misled since every move of the Dow is attributed to something that has occurred in the news. Example: “The Dow was up today as it reacted to improving auto sales.” Or “The market backed off today on disappointing forecasts concerning after-holiday retail sales.” Or “The market closed on a brighter note as Ford reinstated its dividend after five non-dividend years.”

Hovering over the whole picture is the dismal fact that the dividend yield on the Dow is now a lowly 2.59%. Anything below 3% is a caution signal that should not be ignored.

Gosh, I hope the upcoming year is not so morose, but let’s sure hope big trends abound!

From Charles Hugh Smith from ‘Of Two Minds’:

I have devoted significant portions of my books Survival+ and An Unconventional Guide to Investing in Troubled Times to an explanation of how community and self-reliance have atrophied under the relentless expansion of the dominant Savior State.

The social capital and “return on investment” earned from investing time and energy in community and other social networks has been replaced by a check from the Savior State–a transfer payment that surely beats the troublesome work of investing in community in terms of risk and return.

The net result of the Savior State dominating society and the economy is the rise of a pathological mindset of entitlement and resentment–the two are simply two sides of the same coin. You cannot separate them.

Once self-reliance has been lost, so too has self-confidence been lost, and the Savior State dependent–individual and corporation alike–soon distrusts their ability to function in an open market.

This is a truly sad, self-destructive state of affairs, and deeply, tragically ironic. The calls for “help” quickly lead to dependence on the Savior State, and that dependence quickly breeds complicity and silence in the face of repression and predation by the State and its corporate partners.

In a very real sense, citizens relinquish their citizenship along with their self-reliance and self-worth once they accept dependence on the State.

I often mention that the U.S. has much to learn from so-called Third World countries that are poorer in resources and credit. In many of these countries, the government is the police, the school and the infrastructure of roadways and energy. Many of these countries are systemically corrupt, and the State is the engine of enforcing that corruption.

Rather than something to be embraced and lobbied, involvement with the State is something to be avoided as a risk. In everyday life, people rarely encounter the government except in law enforcement or schooling.

As a result, people depend on their social capital and community for sustenance, support, work and connections.

This is not altruism, it is mutually beneficial.

Once a community dissolves into atomized individuals who each get a payment from the Central State, then they no longer need each other. Rather, other dependents on the State are viewed as competitors for the State’s resources.

These atomized, isolated individuals have a perverse relationship with the State and what remains of the community around them: lacking the self-worth earned from work or engagement/investment in a community, then their only outlet for self-identity is consumption: what they wear, eat, drink, etc. as consumers.

This dependence on the State also serves the State’s goal, which is a passive, compliant populace of dependents, and distracted, passive workers who pay their taxes. Thus dependence on the State and a hollow consumerism are ontologically bound: one feeds the other.

The era of debt-based consumption as the engine of “growth” and “prosperity” is coming to an end. Adding debt via credit no longer creates growth; it actually takes away from the economy by expanding debt service (interest payments).

The vast majority of developed-world people have had the basics of life since the late 1960s — transport, food, shelter and utilities. The “growth” since then depended on cheap, abundant oil and a consumerist mentality in which one constantly re-defines and renews one’s identity not from social investments in others or the shared community but from consumption.

Not coincidentally, this dominance of consumption as the only metric for “growth” (as opposed to, say, productive activity) has been paralleled by the dominance of the Central State.

The end of credit-based consumption will be a very positive development, as will the devolution of the Savior State. The Savior State is like oil–both are at their peaks and are starting their inevitable slide down the S-curve. The world they created was not as positive for human fulfillment and happiness as we have been told.

Indeed, study after study has found that people with the basics for life, a higher purpose that requires sacrifice and a tight-knit community are far and away happier than isolated, atomized, insecure consumers, regardless of their wealth and consumption.

This potential to re-humanize our economy is why I am hopeful.

Nice. Words for 2012.

Seen in the WSJ is wisdom that “central banks are creating a tinderbox by keeping alive many very bad investments”:

The ubiquitous greenery of the season has me thinking conifers and stock market crashes. There is much to be learned from the coned evergreen trees that form vast forests across the Northern Hemisphere. As the oldest trees on the planet, the mighty conifers have survived threats of catastrophic extinction since the time of the hungry herbivorous dinosaurs.

The conifer’s secret to longevity lies in a paradox: Their conquest has been largely the result of episodes of massive forest destruction. When virtually all else is gone, conifers show their strength and prowess as nature’s opportunists. How? They have adapted to evade competitors by out-surviving them and then occupying their real estate after catastrophic fires.

First, the conifer takes root where no one else will go (think cold, short growing seasons and rocky, nutrient-poor soil). Here, they find the time, space and much-needed sunlight to thrive early on and build their defenses (such as height, canopy and thick bark). When fire hits, those hardy few conifers that survive can throw their seeds onto newly cleared, sunlit and nutrient-released space. For them, fire is not foe but friend. In fact, the seed-loaded cones of many conifers open only in extreme heat.

This is nature’s model: overgrowth, followed by destruction of the overgrowth, and then the subsequent new growth of the healthiest and most robust, which ultimately leaves the forest and the entire ecosystem better off than they were before.

Pondering these trees, it is not too much of a stretch to consider the financial forests of our own making, where excess credit and malinvestment thrive for a time, only to be destroyed—and then the releasing of capital into markets where competition has been wiped out. The Austrian school economists understood this well, basing a whole theory around this investment cycle.

After the purge, great investment opportunities are created, from which prolific periods of growth emanate—provided that sufficient capital remains to reinvest into the fertile and now-open landscape.

Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire.

What obviously occurred was that the most fire-susceptible plants had been given repeated reprieves (bailouts, in a sense), and they naturally accumulated, along with the old, deadwood of the forests. This made for a highly flammable fuel load because when fires are suppressed the density of foliage is raised, particularly the most fire-prone foliage. The way this foliage connects the grid of the forest, as it were, has come to be known as the “Yellowstone Effect.”

A far better way to prevent massively destructive fires is by letting the fires burn. Human intervention in nature’s cycles by suppressing fires destroys the system’s natural homeostatic forces.

Strangely parallel to the Yellowstone catastrophe was the start of the federal government’s other fire-suppression policy with the 1984 Continental Illinois “too big to fail” bank bailout. This was followed by Alan Greenspan’s pronouncement immediately after the 1987 stock market crash that the Federal Reserve stood by with “readiness to serve as a source of liquidity to support the economy and financial system,” which heralded the birth of the “Greenspan put.” The Fed would no longer tolerate fires of any size.

From a forestry point of view, the lessons were learned. In 1995, the Federal Wildland Fire Management Policy stated, “Science has changed the way we think about wildland fire and the way we manage it. Wildland fire, as a critical natural process, must be reintroduced into the ecosystem.”

Herein are pearls of great wisdom for central bankers today. Central banks are creating a tinderbox by keeping alive many very bad investments, fertilizing them with everything from artificially low interest rates to preferential liquidity to outright securities purchases. As these institutions and instruments overrun the financial landscape, they hamper the economic ecosystem and perpetuate the environment of low growth and high unemployment in which we currently find ourselves.

Seeing periodic, naturally occurring catastrophes as part of the growth cycle requires thinking more than one step ahead, not only longer term but, more specifically, intertemporally. This is perhaps an insurmountable cognitive challenge, both to investors and central bankers in today’s news-flash world. When contemplating the forest, we may intuitively understand nature’s logic of growth. Yet when we look at the seeds of destruction we have sown through current monetary policy, it is clear we are lost in the trees.

Mr. Spitznagel is the founder and chief investment officer of the hedge fund Universa Investments L.P., based in Santa Monica, Calif.

No one is going to pay attention to logic like that when we are all locked in a ZIRP world.

More on BlueCrest.

The following excerpt was added to the second edition of my book in the fall of 2005. It was from commentary from a February 2004 edition of The Economist:

“The size of banks’ bets is rising rapidly the world over. This is because potential returns have fallen as fast as markets have risen, so banks have had to bet more in order to continue generating huge profits. The present situation “is not dissimilar” to the one that preceded the collapse of LTCM…banks are ‘walking themselves to the edge of the cliff.’ This is because—as all past financial crises have shown—the risk-management models they use woefully underestimate the savage effects of big shocks, when everybody is trying to wriggle out of their positions at the same time…By regulatory fiat, when banks’ positions sour, they must either stump up more capital or reduce their exposures. Invariably, when markets are panicking, they do the latter. Because everyone else is heading for the exits at the same time, these become more than a little crowded, moving prices against those trying to get out, and requiring still more unwinding of positions. It has happened many times before with more or less calamitous consequences… There are any number of potential flashpoints: a rout in the dollar, say, or a huge spike in the oil price, or a big emerging market getting into trouble again. If it does happen, the chain reaction could be particularly devastating this time.”

I am no prophet, but I do feel satisfaction that I included that excerpt in this book more than 6 years ago, long before we ever got to the chaos that was October 2008. That excerpt unfolded just like a movie script with trend traders again winning big. So I ask: “Are you prepared to profit when the next unexpected smack down appears?”

John Hussman writes:

Nietzsche famously said “What does not kill me makes me stronger.” The corollary is “What constantly rescues me makes me weaker.” The world will only stop looking for bailouts when policy makers stop handing them out.

Hussman is wise. However, you don’t need to wait for the end of bailouts to profit in your account. Systematic trend followers do not make their trading decisions based on what policy makers do or don’t do. Think about it. More? See: Trend Commandments.

Hat tip for Hussman article: www.pragcap.com.