By now we are all painfully aware of the direct and now not
so secret support the equity markets are enjoying from the Federal and their
Broker Dealer proxies. From their point
of view what they are doing makes perfect sense and is moral, in their
eyes. Let’s review why they are doing
this.
- Bank
valuations must be at attractive levels to allow for follow-on Secondary
offerings to recapitalize their balance sheets. An additional knock-on
effect is the ability for the banks to mark as profits any rise in their
portfolios due to equity valuation gains. - Large
Insurance companies also are incredibly undercapitalized, and any rise in
the equity market releases strain in future insurance rate increases and
requirements to sell more equity, plus they also get to remark their
assets. - The
banks are holding a lot of commercial real estate debt and REIT debt, as equities rise they get to
refinance or sell equity to buy time, also supporting the banks balance
sheets. - Pension
funds, this in my view the new big monster, reports are out this week that
show State Public Pension funds are undercapitalized by over 2 Trillion
dollars. Only three ways to solve it, collect more, disburse less, and/or
have a higher rate of return.
Number one is political suicide right now, number two, is a
nonstarter as the unions won’t cooperate, thus leaving number three. - Here
is one nobody talks about, Tax receipts.
When is the only time in the last 50 years we ran a budget
surplus? Yup, during the last stock
market bubble. What propelled
it? You guessed it, cap gains
taxes. When you have a tax regime
that is so progressive, you can only generate sufficient tax revenues by
letting the wealthy generate capital gains.
OK, you can see from their point of view the upside is a no
brainer. But, beside from the sheer
illegality and moral aspect of this, how will it help us bears. We have been ramming our heads against
support lines, negative divergences, poor fundamentals, etc. But we are up against free and unlimited
money, so what do we look for?
In my view, the FED and the political elite only fear three
things. Unacceptable increases in food
and energy costs, an alternate reserve currency, and/or a loss of control of
interest rates.
With 20% of the population un or underemployed, any
additional rise in gasoline prices will bring a howl of protest from the people
who see that the banks are bailed out, getting bonuses, and the rich having a
strong stock market. The cost of energy
is being driven by the price of the dollar, and in my view has reached its
tipping point. I believe this will knock
the carry trade fuel from the market.
Interest rates over 4% will prove to be a strong competitor
to the stock and Reit markets, we have now reached this level. Only strong fear of loss in the equity market
will scare people into bonds and lower the rates. Our government will sacrifice the stock
market on the alter of the bond market.
Thirdly, the FED under no circumstance will allow our
reserve currency to be supplanted by commodities based alternatives, without a
huge fight. We are seeing some of that
exposed through disclosures of the massive short positions in the currency
metals by the Primary brokers. Silver is
not backing down in price, as gold has done, and gold usually follows silver.
Bottom-line, we are close to the tipping point, I think all
future moves will now have other consequences.
I always maintain a long gold position and every time
Oil gets to the $80 level I short it. I manage my positions by hedges with
options. I am also watching TBT above 50
as a signal that the bond market is in protest.
Good trading.
