No period has been more frustrating for trend followers than the past 18-24 months. As a long-term trend follower, we know that we have the right solution for the ultimate disposition of the markets….that being DOWN.
However, time and again central banks and regulators around the world have majored in "kicking the can down the road," instead of facing the realities that developed market countries are broke and so are their banking systems.
No greater example of this can be seen than the ECB's 3 year bank funding operation (LTRO). The first LTRO was held on Wednesday and a record 523 banks received 489 billion Euros ($639 billion) in cash, loaned over 3 years at just 1 percent according to CNBC.
Now let's quickly dissect this. Member banks put up sovereign debt and other bad collateral to receive fresh, low interest loans so they can invest in businesses and more sovereign debt.
Hum! Doesn't this scheme sound familiar?
It occurs to me that Quantative Easing I and II were both supposed to accomplish the same liquidity objectives…..i.e. spur growth. Seems to me we recently concluded here in the good old U.S. that neither easing accomplished its goal.
However, what it did accomplish successfully was to move the crap off the bank balance sheets and move them to the public balance sheets. In one of the greatest rape jobs in history, you and me (Joe Public) are now assuming and paying for the outrageous behaviors of the banksters.
So it would only make sense that the same bait and switch would now take place in Europe wouldn't it? It is clear to me that central banks around the world were created years ago to rule over their cartel of banks, not do anything positive for their member states. So now we have the ECB doing the same injustice to its member countries as the Fed did to us.
The bottom line is this liquidity will allow European banks not to do more loans, but to arbitrage the spread between their LTRO lending rate and the rate their receive by buying riskier paper. The hope here is enough time will pass that banks will be able to heal themselves through record earnings, like here in the U.S.
The debt assumed by the ECB and Fed will never be made good and their will continue to be a race to debase their respective currencies. If not debasement, we will face default as some point from member countries. This is how governments take care of their indiscretions while saving their bed fellows, the banksters.
So where will 2012 markets go? Only God knows!
I will say that informally I have reviewed past trend follower returns and I have never ever seen a period last this long where there is no trend, just consolidation.
Our feeling is this will break in 2012. It could even break upward as markets bid up the "company line" that everything is now ok in Europe and the U.S. will continue to expand slowly.
However, the charts continue to signal that we are in bear market (50 day moving average of price (solid blue line) below the 200 day moving average (solid pink line)). They also show us that markets are currently consolidating….again. However doing so in a triangle pattern (black dotted lines) and near the top of the downward channel range (green dotted lines).
Something has got to give here! Either we break this channel and move up or we start a fall to the bottom of the channel in 2012. Our guess is the latter.
So here is to a trend in 2012! It is about time!
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