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  • Tidal Report – 16 Oct 2010 – It’s the psychology, stupid : third wave group
    forms of technical analysis are also flashing warning signals The internal characteristics of the upwards move in stock markets since the March 2009 low and subsequent highs in April is showing clear signs of exhaustion Using the US Dow Jones Index as an example its strength in recent times has been due to only three stocks Google Amazon and Apple Karl Denninger from The Market Ticker explains that this is a terminal signal This is all that s left of this market Three stocks Banks got pounded again today as did quite a few other things other than Seagate which allegedly is maybe being taken private All the money went here which produced a rocket in the Nasdaq 100 since that s the lion s share of the index The rest Not so hot Anyone remember 1999 and early 2000 as leadership narrowed Or better 2007 The four horsemen Well now there are three carrying the entire market Woe be to you when the parabolic game comes apart and it will Be aware folks this sort of thing never ever ends well Ever Category tidal reports Tags commodities elliott wave junk bonds karl denninger psychology robert prechter Comments 5 Responses to Tidal Report 16 Oct 2010 It s the psychology stupid f150 owner says November 11 2010 at 10 37 am It s time to bring these babies back from obscurity Reply college grants says November 10 2010 at 5 04 pm Wow this is a great resource I m enjoying it good article Reply HBS says October 18 2010 at 9 28 am An IRISH Explanation of Derivative Markets Heidi is the proprietor of a bar in Detroit She realizes that virtually all of her customers are unemployed alcoholics and as such can no longer afford to patronize her bar To solve this problem she comes up with new marketing plan that allows her customers to drink now but pay later She keeps track of the drinks consumed on a ledger thereby granting the customers loans Word gets around about Heidi s drink now pay later marketing strategy and as a result increasing numbers of customers flood into Heidi s bar Soon she has the largest sales volume for any bar in Detroit By providing her customers freedom from immediate payment demands Heidi gets no resistance when at regular intervals she substantially increases her prices for wine and beer the most consumed beverages Consequently Heidi s gross sales volume increases massively A young and dynamic vice president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi s borrowing limit He sees no reason for any undue concern since he has the debts of the unemployed alcoholics as collateral At the bank s corporate headquarters expert traders transform these customer loans into DRINKBONDS ALKIBONDS and PUKEBONDS These securities are then bundled and traded on international security markets Naive investors don t really understand that the securities being sold to them as AAA secured

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-16-oct-2010-its-the-psychology-stupid/ (2013-02-03)
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  • Tidal Report – 9 Oct 2010 – The US is no canary : third wave group
    is how mad the world has become the poor jobs report was received as good news because it boosted hopes that the Federal Reserve will now go ahead with Quantitative Easing MkII otherwise known as money printing Or as noted economic commentator Mike Shedlock put it To recap the only way the economy can get better is if it gets worse first So bad news is good news and good news shows the bad news worked Thus all news is good news Such is the magic of QE No wonder the market went up The stockmarket response to the news while interesting is not as important as the bond market response Crazy brave blogger and all round agitator Karl Denninger perfectly captures the mood of the bond market You ve all heard the pundits tell us that The Fed is going to QE2 and by doing this monetization of government debt rates will drop and the economy will be supported This is a lie The intent of QE is to try to convince the people that inflation is in the future When people become convinced that inflation will occur they demand more to borrow their money because otherwise you lose when you lend your capital to that inflation Indeed this was the expectation that The Fed managed to for a while foster with the original QE But what has the bond market done since even in the face of threats to do more QE It has said we have no expectation of inflation even when you threaten to QE some more Get this one through your head folks The bond market believes The Fed will FAIL So why the huge stock market rally this month Because in the general sense the stock market is comprised of the short bus riders and you listen to CNBS and others who are trying to jawbone people into believing The Fed is omnipotent The bond market knows the truth Over the years if you placed your bets on either the bond or stock market being right when they differed essentially 100 of the time the bond market ended up on the right side of the bet So yes The Fed may well QE2 although I m not convinced given that the last time the bond market was in fact moving higher in front of the announcement that is they believed it This time it s doing the opposite which strongly implies that either 1 The bond market doesn t believe The Fed will do it or 2 The bond market believes they ll do it and it will in fact do nothing There s nothing worse for a central banker than for the public to discern that they are out of bullets but today Mr Bond is clearly saying exactly that The US is also now having to deal with the snowballing foreclosure fraud crisis otherwise known as foreclosure gate of course While the topic has been viral among economic bloggers for some time

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-9-oct-2010-the-us-is-no-canary/ (2013-02-03)
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  • Tidal Report – 2 Oct 2010 – The Irish Canary in the Coal Mine : third wave group
    up from the periphery After all it s not just Ireland it s Portugal and Greece and Not just that there s the additional question of whether the Irish and the Portuguese and the Greeks will ever really fit into the one size fits all currency region The ECB has run monetary policy with both eyes firmly on Germany During the late 1990s and early part of the new century that meant keeping interest rates low to accommodate Germany s struggles with financing reunification Those low rates might have suited the German economy but they were deeply negative in real terms across peripheral Europe igniting massive booms The Irish property bubble made Las Vegas and Miami look like amateurs Low interest rates were certainly part of the equation but the rapid expansion of the Irish economy between the mid 1990s and 2007 was also the result of tax breaks planned social policies and a concentration on the knowledge and bioscience economies by an aggressive Irish government The Celtic Tiger was born It was the property market however that ultimately led to the downfall of the Tiger There is no doubt that the property market performed spectacularly during the boom helped along by the particularly loose lending practices of banks such as Anglo Irish Bank According to the Economic and Social Research Institute of Ireland Irish house prices increased 300 per cent between 1996 and 2008 with the average home rising from 75 000 to 300 000 euros compared to a total rise of 30 per cent in the consumer price index as an aside this is very similar to the current Australian experience During these boom years Ireland s banks grew spectacularly as they funded this massive speculation and the Irish economy became significantly dependent on the financial sector In the end it was the banks exposure to a small number of high rolling developers and construction companies investing in the overheated property market that caused their downfall When the Global Financial Crisis hit Ireland experienced a fully fledged banking crisis leading to the government guaranteeing the liabilities of the major banks a guarantee that is is still in place The property market collapsed According to the Economic and Social Research Institute of Ireland 40 per cent of homeowners have negative equity in their homes as a result of the more than 50 per cent fall in property values over the past two years On top of that 36 000 homeowners are six months or more in arrears on their mortgage payments The banks have been left with balance sheets filled with bad residential and commercial property loans The government has persisted with ongoing bailout of the industry in the hope the real estate market will improve and repair the banks precarious capital position Two years on however it is becoming clear that the real estate market is showing no signs of bouncing anytime soon Ireland is still a country with a huge number of unwanted properties many only half

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-2-oct-2010-the-irish-canary-in-the-coal-mine/ (2013-02-03)
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  • Article – Australian Housing: A Bubble in Search of a Prick : third wave group
    increasingly by the banks issuing bonds to foreigners As shown below the percentage of bank liabilities funded from foreigners has increased from just over 5 per cent in 1989 to around 22 per cent currently totalling over 500 billion Over the same period the banks increased the proportion of loans channelled into housing with housing loans increasing from around 35 per cent of total lending in 1990 to 57 per cent currently Anyone seeking an answer as to why Australia owes so much money to foreigners only has to look to the banks model of borrowing heavily offshore to pump up housing With the banks awash with funds sourced from both domestic and foreign sources and with a higher proportion of bank assets loans being directed into housing is it really a surprise that house prices and household debt levels have exploded over the past two decades The key risk is that Australia s ability to sustain current house prices let alone further price increases rests with the willingness of other countries to continue lending Australia s banks money But in times of crisis such as when Lehman Brothers collapsed foreigners tend to zip up their wallets leaving our banks house prices and broader economy exposed to a sudden liquidity shock as the banks are unable to roll over their foreign borrowings let alone increase them Few people realise that the Australian Government s October 2008 guarantee of bank funding and deposits was issued after the larger banks made it clear to the Government that they were facing extreme difficulty in rolling over their wholesale funding meaning that they would have to immediately withdraw credit from the Australian economy and might eventually face insolvency So while it might be true that Australia s banks satisfactorily managed credit risk avoiding the excesses of the sub prime lending prior to the onset of the global recession their heavy offshore borrowing created a liquidity risk that also rendered them too big to fail eventually leading to the Government s funding guarantee Hence whilst many American and European banks became insolvent on the asset side of their balance sheet due to holding dodgy loans and derivatives Australia s banks also faced insolvency except that it was on the liability side of their balance sheet Again a greater exploration of these issues is found in The Great Crash of 2008 Supply side squeeze A common view held by the mainstream Australian press and property experts is that Australia s strong house price growth is due largely to a chronic undersupply of homes Take for example this recent statement from Industry Research and Forecasting firm BIS Shrapnel An undersupply in the Australian property market will force residential property prices up by 30 according to a BIS Shrapnel chief economist Frank Gelber gave members at a Real Estate Institute of Victoria lunch a very optimistic forecast for house prices as reported in the Sydney Morning Herald At the end of the day we haven t got a bubble in our residential market We re undersupplied not oversupplied House prices will go up another 30 per cent over the next three years We re not over geared we re not overvalued and we re not oversupplied he said I can t remember in the last 30 years a time when I have been more comfortable and optimistic about investment in the market Australia s recovery would not be affected by global economic uncertainty he added Observers from countries that have experienced housing booms and busts would be familiar with this kind of economic delusion Remember this testimony from Federal Reserve Chairman Ben Bernanke in 2005 House prices have risen by nearly 25 percent over the past two years Although speculative activity has increased in some areas at a national level these price increases largely reflect strong economic fundamentals including robust growth in jobs and incomes low mortgage rates steady rates of household formation and factors that limit the expansion of housing supply in some areas How about the classic land housing shortage argument previously used to justify sky high house prices in Japan the UK USA and Ireland Leading up to Japan s bursting real estate bubble in 1990 we were told that this time was different house prices simply reflected the growing economic power of Japan Inc and there was a land shortage in overcrowded Tokyo Today Japanese real estate prices are still less than 50 of that peak value reached more than two decades ago During the U K bubble Brits blamed zoning requirements for creating land shortages until prices crashed to the lowest multiple of income on record in 1997 Similarly builders in Northern Ireland predicted severe housing shortages if planners did not release more land in 2003 And before America s bubble burst there were land shortages across the country from Florida s undeveloped west coast to the deserts of Nevada from Forbes So is Australia different to these other nations Is Australia s housing shortage genuine justifying the high price tag Or is it a case of same story different bubble To investigate this issue I have first plotted the average number of people per dwelling and the average dwelling size as measured by the average number of rooms per dwelling According to the ABS the average number of people per dwelling has fallen significantly whilst the average number of rooms per dwelling has been increasing In fact the number of people per dwelling in Australia has fallen steadily for the past 50 years from 3 6 in 1960 2 75 in 1990 2 62 in 2000 and 2 56 in 2008 So the growth in the number of dwellings has actually outstripped the increase in the population and therefore the average number of occupants per dwelling has fallen considerably Only in the past year or so has the rate of new building fallen behind population growth as evidenced by a small increase in people per dwelling in 2008 Based on these measures

    Original URL path: http://www.thirdwavegroup.com.au/general/article-australian-housing-a-bubble-in-search-of-a-prick/ (2013-02-03)
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  • Tidal Report – 26 Sep 2010 – The Confidence Con : third wave group
    fair affordability has been touched on but the market is generally described as relatively benign We have most certainly never heard the government express concern about the housing market in terms such as highly indebted households vulnerability of the economy to shocks households more exposed than previously Yet this is the advice they have been receiving from treasury It is an astonishing disconnect between what the government receives as considered treasury advice and the information it gives to the Australian public This is an idea we have explored many times in the Tidal Report and often find ourselves amazed at the general acceptance of government views such as these that are not supported by the facts One would think Australians in general and journalists in particular would be more cynical and inquisitive So why would the government be at pains to have the housing market seen as unremarkable For the same reason the Commonwealth Bank fudged its housing data for the same reason the Reserve Bank never publicly acknowledges house prices are too high for the same reason the government obfuscates confidence Everything about the economy and capital markets comes down to confidence The stock market is a great example of this social mood but the effects of confidence reach into the workings of the economy When the mood is optimistic people buy stocks and increase their productive efforts thereby growing the economy As the mood turns pessimistic people sell stocks and reduce their productive efforts As a small aside economic trends tend to lag stock market trends because the consequences of decisions made at the peaks and troughs of social mood take some time to play out It is this confidence that governments around the world understand is needed for economies to grow and they do their utmost to support that most important human emotion whether there be a basis for it in reality or not The idea being that even if there is no reason to be confident if the people are confident it will create a positive feedback effect It is not accidental that consumer confidence and business confidence are routine economic measures Governments have worked from this playbook for decades and it has appeared to work well The point is that governments and economists have not realised that much of the economic growth that has occurred over the past 40 years has been the result of confidence and debt as opposed to confidence and increased productive effort Debt has been the fuel and continued prosperity requires a willingness of people and businesses to take on more debt The Global Financial Crisis however has shown that there is a very real chance that this time it is different The problem is there is a rapidly diminishing capacity for more debt Post GFC businesses and consumers have been paying down debt and banks have been reluctant to lend We have reached what might be called peak debt and economic growth can no longer be bought with debt We

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-26-sep-2010-the-confidence-con/ (2013-02-03)
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  • Tidal Report – 19 Sep 2010 – Psychology of a housing market : third wave group
    is owed on it Do you think that psychology feels familiar to Australian property investors Certainly the frenzy to get into a perpetually increasing housing market would be a comfortable fit Years of falling prices however are not part of the Australian experience Currently the dangerously universal view is that property prices never fall Property market psychology is different to the psychology in other markets such as stocks In the Psychology of Deflation Explains Why House Prices Will Continue to Fall Edward Harrison of Credit Writedown s explains In a housing market selloff markets are more byzantine properties are unique transaction costs are high and sales are infrequent This means that in assessing one s set of interests and their relative importance many sellers decide not to transact because their reservation prices are still anchored in bubble psychology So the first thing to give way in a housing bust is volume Lower transaction volume is a prelude to lower prices If volume is falling you can be sure it has done so because sellers have not lowered their reservation prices and are waiting for prices to rise again But of course if the psychology of deflation has set in for buyers they are not going to pay more And that means prices and sales volumes drift lower as forced sellers dominate the marketplace An interesting side note volumes in the Australian property market have recently started contracting Moreover the psychology of price deflation is also the reason markets tend to overshoot to the downside Buyers are saying wow those prices sure have come down Maybe they will come down even more I think I will hold off on buying and see This type of psychology is self reinforcing and almost always takes markets below fair value when value players snap up bargains and change the psychology Barry Ritholtz of the Irving Housing Blog asks why is sentiment so important Why are market collapses signified by changes in consumer sentiment First he says we need to distinguish between deflating market bubbles and market swings causing temporarily low prices The US housing bubble was a bubble prices became elevated from fundamental values and they are in the process of correcting back to true value Prices were not temporarily depressed they were temporarily elevated which leads to the inevitable conclusion that in a bubble scenario prices do not recover When market sentiment is still in denial like most of California s coastal markets are people cling to the hope of a recovery that is not going to happen Stories about the double dip may push the market into fear but it is nowhere near capitulation and despair like the subprime markets are today As long as there is the delusion that prime markets are somehow going to avoid the deflation of the bubble there will be an overhanging supply of sellers waiting for a slight improvement to sell their properties and the distressed debt in the market remains As long as there is

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-19-sep-2010-psychology-of-a-housing-market/ (2013-02-03)
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  • Tidal Report – 12 Sep 2010 – Fudging the Data : third wave group
    is modest think Greece Spain Portugal Iceland Italy Japan UK US etc perhaps a smaller list would be those countries with less debt Jim Rogers is talking about Australia s private debt and the fact it is predominantly foreign debt the point Barnaby Joyce was trying to make Figures from the Australian Bankers Association demonstrate this exposure Australian banks have total funding requirements of 1 4 trillion of which 366 billion or 26 per cent is financed by foreign investors So based on the above data one would expect the CBA to be trying to convince their much needed overseas investors that everything is perfectly fine with the Australian housing market nothing to worry about here please keep lending us money So what is the story that broke with respect to this presentation The CBA has been found out fudging the data that allowed them to come to this optimistic conclusion The CBA s presentation compares house price to income ratios in Australia with those from other coastal cities The argument being that Australia s relatively high house price to income ratios are due to the fact that Australia s major cities are all located on the coast The following table as it appears in the CBA presentation shows that Australia s house prices compare quite favourably to other cities Sydney has a ratio of 6 2 compared with San Fransisco which has a ratio of 7 0 and even more favourably to Vancouver which has a ratio of 9 3 That would be all well and good however it is obvious that the data has been cherry picked to come to the required conclusion Kris Sayce picked up on the fiddle In order to make their point the CBA have used the Demographia numbers as a reference point for all the non Australian cities yet they ve used the UBS numbers for the Australian cities Why on earth would the bank do that Simply because if they d used the Demographia numbers it would draw exactly the opposite conclusion to the argument they re trying to make The fact is they ve conveniently grabbed the bunch of numbers that fits their argument and discarded the ones that don t If they d used the Demographia numbers for all the cities including the Australian cities the table would look like this Paints a slightly different picture doesn t it Actually it paints a completely different picture One shows an unsustainable bubble the other shows a bunch of figures comparable to elsewhere in the world The other point to make is that the choice of comparison cities is also a tad disingenuous The international cities that the CBA report has selected have all come from the Demographia Least Affordable table The figures for cities such Toronto 5 2 Montreal 4 9 London 7 1 Manchester 4 6 Dallas 2 7 Washington 3 8 demonstrate a very real bias in the selection process The obvious question to ask is why would CBA

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-12-sep-2010-fudging-the-data/ (2013-02-03)
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  • Tidal Report – 4 Sep 2010 – The Great Ignored : third wave group
    to sovereign governments did not cure the Global Financial Crisis just delayed the day of reckoning Throughout the documentary various experts are interviewed and if they are right as we believe they are then the worst is yet to come as governments struggle to not only pay down the debt they now owe as a result of their bank bailouts and bad investment decisions but struggle to pay the interest bill on that debt One of the principal expert contributors was a US commentator by the name of Peter Schiff He is famous for being one of the few analysts that forecast the economic problems confronting the Western World before the Global Financial Crisis struck At the time of his forecasts he was pilloried for his negative views which with hindsight have turned out to be quite prescient The attached video shows just what he was up against at that time an rather elegant riposte to those who feel the crisis was unforeseeable Well nothing has changed Peter Schiff s current pessimism as reflected in Overdose is being similarly ridiculed and dismissed For some reason the herd prefers to listen to those that have been proved wrong is that optimism or a reluctance to open ones eyes to reality Essential viewing For Peter Schiff the consequence of the spending binge by governments in response to the first Global Financial Crisis is crystal clear We re in so much trouble now because we got drunk on all that federal government alcohol The governments saved the banks but who can save the governments unfortunately the music will eventually stop Category tidal reports Tags johan norberg overdose peter schiff Leave A Comment Click here to cancel reply Name required Mail will not be published required Website subscribe Have our blog posts delivered straight

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-4-sep-2010-the-great-ignored/ (2013-02-03)
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