Wealthbuilder Stock Market Brief 13th.

November 2014

The Unfolding Economic Crisis in Europe:

Since October 24th Der Spiegel the German newspaper has been running a fascinating series of
essays on the unfolding economic crisis in Europe.
The scope and detail of the series has caused a bit of an online stir in that this bastion of German
mainstream journalism painted a very negative view of the future and accordingly many are
wondering whether the German elite are finally beginning to question the sustainability of the
current monetary paradigm.
The main issues addressed in the articles were the lack of economic inclusion, the instability of
contemporary European economic policy and the increasing wealth disparity among European
social groups. (An example quoted by the author outlined how, in the Swiss Canton of Zrich,
the 10 richest residents own as much as the poorest 500,000).
Surprisingly Der Spiegel was very critical of the European Central Bank. The paper went to
pains to point out that despite years of easy monetary policy the Euro was still very much a
vulnerable project and highlighted the fact that while many problems still remained there was
no more ammunition left in the ECBs arsenal of weapons.
This conclusion perturbed a number Irish politicians because vary rarely has such a negative
German spin been placed on European monetary policy. Upon reading the four articles one is
left with the distinct impression that Euroland was a failing entity exhausted from years of
fighting ongoing crises ready to finally roll over and die when the next recession hits.
Thus despite the glam and glitter surrounding the memorial celebrations for the fall of the Berlin
wall, things are not so rosy in the European garden. Next year the British go to the polls to pick a
new parliament. The English Prime Minister David Cameron has publically stated that if he wins
he will hold a referendum to take Britain out of the European Union. Many believe that such an
event might just be the catalyst to push the EU over the edge.2015 could prove to be a
momentous year for Europe and it is my view that Der Spiegel is beginning to see the writing on
the wall.

European Deflation Raises Its Ugly Head:

Apart from the issue of economic, social and political exclusion, Europes other major problem
is that of deflation.

To combat a serious collapse in the circulation of money the ECB has embarked on the drastic
policy of negative interest rates. Here is what a popular blog has to say about this matter:
It Begins: German Bank 'Charging' Negative Interest To Its Retail Customers:
Submitted by Simon Black via Sovereign Man blog, 4th. November 2014
Central bankers today have a delusional view of the world. Just three months ago, Mario Draghi
(President of the European Central Bank) embarked on his own folly by taking certain interest
rates into NEGATIVE territory.
Draghi convinced himself that he was saving Europe from disaster. And like Don Quixote of
Spanish lore, everyone else has had to pay the price for his delusions.
On November 1st, the first European bank has passed along these negative interest rates to its
retail customers.
So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany,
you now have the privilege of paying 0.25% per year to the bank.
Weve already seen this at the institutional level: commercial banks in Europe are paying the
ECB negative interest on certain balances.
And large investors are paying European governments negative interest on certain bonds.
Now were seeing this effect bleed over into retail banking.
Its starting with higher net worth individuals (the average guy doesnt have half a million euros
laying around in the bank). But the trend here is pretty clear financial repression is coming
soon to a bank near you.
It almost seems like an episode from the Twilight Zone or some bizarre parallel universe.
Thats the investment environment were in now.
Bottom line: if youre responsible with your money and set some aside for the future, you will
be penalized. If you blow your savings and go into debt, you will be rewarded.
If we ask the question cui bono, the answer is pretty obvious: heavily indebted governments
benefit substantially from zero (or negative) rates.
On the ECBs own website, they say that negative interest rates will benefit savers in the end
because they support growth and thus create a climate in which interest rates can gradually
return to higher levels.
Im not sure a more intellectually dishonest statement could be made; theyre essentially telling
people that the path to prosperity is paved in debt and consumption, as opposed to savings and
production.
These people either have no idea how economies grow and prosper, theyre outright liars, or
theyre completely delusional.
In my opinion the main reason why this deflation is spreading throughout Europe is the fact that
stratospheric structural unemployment rates exist among European youth in Cyprus, Greece,

Portugal, Spain and Italy. Seven years on no strategic initiative has emerged from Brussels to
tackle this serious human catastrophe. How long it can continue without social breakdown is any
ones guess but it is this factor which is behind regions such as Catalonia and Scotland seeking to
go it alone.
Many believe that the only long term solution to Europes economic malaise is reversion back to
a union of sovereign states within an economic union rather than a political and monetary one.
Such a move would allow the inefficient southern European states devalue their currencies and
thus achieve economic competitiveness. However it would appear the powers that be will not
countenance such a move. Sometimes it requires fate to take a hand. I am sure in 1989 the
politburo of the Soviet Union did not wish to see their hegemony diminish but their Empire
collapsed, not due to desire but due to the sovereign power of economic truth.

Is The Market Preparing To Go Hyperbolic?

Despite the recent run up in the markets since the 17th. of October when you look at the S & P
500, The Dow Industrials and the NASDAQ there is no evidence to be seen of real momentum
breakdown.
Yes the market advance has lost some power over the last week but this looks to me like the
market is merely catching its breath in preparation for a strong rally into the New Year.
Such price action allows the main indices to wear down their overbought positions through time
rather than through price retraction.
Thus while ideally I would a nice pullback to give some technical support to new long positions
entered into I do not think it is going to happen. Thus any major moves up should be taken
advantage of as I believe that market has a higher probability of going hyperbolic in early 2015
than contracting significantly.
Chart: S & P 500: Daily

Chart: Dow Industrials: Daily

Chart: QQQ ETF: Daily

Charts Courtesy Of Worden Bros.

Sources:
Der Spiegel The Zombie System, Michael Sauga, October 24th 2014.
Sovereign Man blog, Simon Black, 4th. November 2014.
Christopher M. Quigley 13th. November 2014