Back from Europe, I had a very tranquil time with some of my extended french family over the past two weeks. Bretagne by the sea is enchanting. The thing that struck me the most while shooting the breeze with my cousins, was the complete disconnect between the serious economic down turn they are now facing, that is expect to get much worse, and the CAC 40 stock market which is on an absolute tare. Something doesn't add up here, and it smells like the stench of rotten fish guts on a Normandy dock.
Sarkozy is behind in the national polls by a significant margin, which would not be the case if things were so great. Stock markets are said to be a discounting mechanism, which look out 3-6 months forward. Yet, If the economy on the ground is stalling in France, and the forecasts for a severe recession are growing louder, why is the market exploding higher? Go go LTRO!
It seems the FED inspired global liquidity landslide has one single purpose, and that is to support the existing unscrupulous & exploitive banking system at all costs. The order of the day is to Inflate financial asset prices across the board, no matter what the collateral damage, or unintended consequences might be. This is great for share holders, but not so great for sharecroppers. The price of petrol is now officially over $10 a gallon in Paris, an all time record high!
Call me old fashion, but I thought the principal role of central banks was to instill confidence and stability in the currency, so as to create a stable working environment in order to promote real industrious economic activity. Seems the only role of monetary policy these days is to incessantly pump up stock prices, by handing over ever more free loads of our money, directly to the trading desks of the largest and most powerful TBTF banks, and then letting their HFT borgs do the market's bidding. Not to mention, the obvious policy measure tip offs readily given to the FED's favorite & most important institutional insiders, well in advance of the majority of market participants. Apparently, keeping the fat cats fat, and the Government pension funds solvent, is the only game in town for the Federal Reserve……..Federal my ass!
I still have a very hard time understanding why so many market players perceive this to be a good thing. Seems more like an act of self interested desperation to me. Call me crazy, but this questionable use of monetary policy, flooding the largest int'l investment banks with endless liquidity, while leaving our governments saddled with even larger unsustainable debt burdens, is very ill advised indeed. If not entirely unethical & down right immoral. Do we now actually really believe that we can print our way to prosperity? If it were possible, every nation on the planet would be rich beyond its wildest dreams, yet curiously they are not.
Those of you who have called the market right thus far this year, will undoubtedly say this is just the same tired old song of a bitter naysayer whom was wrong all along, and has been run over by the Bernanke liquidity express. Let me assure you, I am not the bitter type, and am happy for all those who have made out like bandits, smartly aboard this unrestrained gravy train, which not only left BDI stranded on the platform, but also ran over his bags on the way out of the station.
Others, simply think that I just refuses to accept reality. According to this happy bunch, the economy is clearly improving, and individual companies are obviously doing a lot better. We are now passing through the all important threshold of a virtuous cycle of self sustained economic growth. Let the re-hiring begin, technology advances have saved the day, and the good times will soon roll once again. QQQ to you…..maybe they are right, but somehow I still remain hauntingly unconvinced.
The gentler SOH souls will say, "your are out thinking yourself again Savant". The less gracious Slopers will say, "Don't be such an Idiot, the trend is your friend". The common thread in the market today, is to simply ride along with the liquidity train, this is only the beginning, and there is much more tasty gravy ahead.
So let me see if I finally get this right. The economy is improving, though we still need continued ZIRP, as well as additional liquidity shots, to make certain it does not lose any steam, as we are about to hit escape velocity, and we certainly can't blow that. We are on the right track, and our incredibly skilled conductor Beny-bag-of-donuts has flawlessly threaded the needle just right. American exceptionalism does it again! The all clear signal has been given, and we can look forward to new all time highs in the market. It's a win win! Either the economy picks up, which is clearly bullish, or if it should sputter, the engine will get stoked yet again, which is also very bullish. Where and when have I heard this before?
Sorry Slope-a Dopes, but I don't buy this election season fairy tale with its perfect happy ending, not even for one second. What the FED is now doing with its incessant QE injections, is mostly driven by political expediency, it's completely artificial, and totally unsustainable. A perfect intoxicant for our capricious, impatient, must have it now society. Like a dog chasing its own tail, it may be fun for a while, but it's clearly insane, and we simply can't get there from here. The continued unabashed & unapologetic financialization of a once robust & healthy U.S. economy, which was the envy of the world, is not something to be proud of. The genuine economy of America's golden era, was built on a solid & sound foundation of dignified human ingenuity, with the real thing, constructive industrious economic activity. Sure, it was not perfect, but it most certainly was not bogus. Unlike legitimate human endeavors, contrived financialization is not durable, and will not lift all boats.
Make no mistake my friends, consumption is not production. Don't be seduced by your new super high definition idazzling Retina display, it is not made in the USA for a reason. Multinational Corporations with access to below cost funding, obtained directly from Fed sponsored TBTF Multinational Investment Banks, are now making more money than God, mostly for their upper most management & share holders, at the expense of full employment in our country. This does not bode well for the future American dream of the common man.
Perpetual growth fueled by ever increasing debt financing, on a planet with finite resources, is simply not feasible. I assure you, what we are witnessing now, is not healthy at all. I identify it as a mostly synthetic global economy, with inevitable diminishing returns for humanity as a whole. The Fed has unwittingly chosen to pursue a never ending cycle of counterfeit money printing, there is no turning back for them now, they will be forced to repeatedly pump/dump/pump/dump/pump this economy until the final plunge / reset occurs. And, I'm just a chump who missed the last pump. The next phase is a dump, and below is where we are currently coming off the tracks:
Track #1, the bond market is finally showing some serious rumblings. Yields were up a wopping 20% on some treasury issues this past week. Most giddy market mavens see this as further evidence that the economy is picking up speed. Many are claiming that the great bond bull market is over, in which case a re-balancing out of bonds into equities has begun, and will only accelerate as we move forward, which is uber-bullish for the market. But what's really behind this sudden change in character of the U.S. bond market, which has been dormant for so long? Surely it can't be vigorous growth, as they would have you believe? If anything GDP has been declining recently, and is flat here at best. Could it be rather that the real (non Fed) buyers are seeing the inflationary writing on the wall, and are now holding out for higher interest payments, before they load up on more Benny bonds? China sure seems to be buying a lot less of our debt these days. Are large private institutional investors & other sovereigns backing off as well? Have the bond vigilantes finally woken up? Whatever it is, its got to be scaring the piss out of the Bernanke. Last thing he needs, is to over heat this run away financial asset freight train any further. Might be time for his boys to smack the stock market back down a notch, so as to keep bond rates from having a dangerous destabilizing prolonged viagra moment.
Track #2, company earnings season is right around the corner, and they are looking very suspect. Consensus year-over-year earnings estimates for the 1st quarter of 2012 are now down to zero, and the trend of estimates is actually falling. Seems the extraordinary productivity gains achieved via the incredible efficiencies brought to corporations from astounding leaps in technology requiring ever fewer employees, may have finally run there course. If sales don't grow, earnings won't either this time around, margin's are actually compressing…..watch out below…..
Track #3, inflation in the things we burn & eat could well be spiking again, and that could easily de-rail this fragile economic recovery. After all, it's the FED themselves that keep telling us the economy is very frail, and still needs further QE right? Hard to see Europe climbing back out of recession on $10 gas, nor the USA de-coupling from the old continent on $6 gas, $15 chickens, and $5 Poptarts. Not to mention the ongoing increases in Chinese labor costs. Might be time to orchestrate an equity / commodity market smack down, to keep Mrs. CRB calm, and make sure Mr. WTI Brent doesn't get any further out of line.
Track #4, every time treasury rates rise by 1%, our national debt goes up by a few more trillion. Don't think Obumma wants any more light shed on that wee little problem before the election. Got to keep the country's financing costs down don't you know…….my guess is they will wack the equity market here, to make sure bond yields stay in check, so that the governments funding costs don't increase any further. They certainly can't afford to make the national debt numbers even more scary than they already are in this political season.
Track #5, the rates on Portuguese & Spanish CDS are trending strongly back up again. Austerity is a bitch when your economy is contracting. The brand spanking new, much touted EU fiscal compact, may have to go out the window before the final draft is even completed. Spain's economy is in a depression, with the official unemployment rate at 24%, and youth unemployment close to 50%, the probability of social upheaval erupting with greater frequency is extremely high. New house prices fell an average 11.2% in the fourth quarter from the same period a year earlier, well below the 7.4% decline in the third quarter, while prices of existing homes was down 13.7% in the same period, the country's statistics agency INE said Thursday.
Spanish banks hold more than €400 billion ($521.32 billion) worth of loans to the construction and real-estate sector, backed by collateral that loses value as property prices slide further. The amount is equivalent to around 40% of Spain's gross domestic product.
Track #6, the BRICS are sputtering in unison towards lower growth. China just announced an official lower growth trajectory, and is currently running a huge trade deficit, which is quite alarming for the worlds largest exporter of manufactured goods. India’s finance minister said Friday that the country would raise taxes and slow growth in spending in an effort to lower its swelling budget deficit. Analysts and investors said, that they were disappointed that he did not announce measures to bolster the country’s slowing economy. According to Reuters, payroll job growth in Brazil’s economy plummeted in February from a year earlier, as a broad economic slowdown forced employers to slow hiring. Manufacturers, farmers and retailers new jobs added in February, were down 57 percent from a year earlier, the Labor Ministry said on Friday. Economists said slumping industrial employment dragged on overall job creation, as local manufacturers struggle with a strong currency, a scarcity of skilled labor and an unwieldy tax burden. Industrial output contracted three times more than economists expected in January. As far as Russia goes, who really knows what reinstated strong man Putin and the Russians are ever up to. Recent forecast changes from Fast Market Research have lowered real GDP growth forecasts for Russia in 2012, as the external environment grows increasingly more challenging.
Track #7, the U.S. & Israel continue to escalate the Iran nuke situation, with ever more serious sabre rattling, along with crippling financial & economic sanctions. Will the administration's bold approach bring the Mullahs to their knees, or will they unwittingly ignite a powder keg? Thus far, these foreign policy measures have served only to embolden the hard liners in Iran, and weaken the moderates. The theocratic hard core muslim party has recently swept the new parliamentary elections in Tehran. While back in Israel, eight ministers tend to support the position of Netanyahu, and Ehud Barak for an attack, against six opponents. Apparently, the Israeli prime minister does not favor waiting until after the U.S. presidential elections to strike. Is he just simply posturing for internal political reasons, or does he actually hold the future of the U.S. presidency in his hands. Hard to see Obumma re-elected with oil at $150. Could this be why the republicans keep advocating for war? Would Bibi prefer a republican in the oval office? After all, he's not too keen on our current POTUS with his muslim roots and all………Will the market easily climb this wall of worry as well?
So you see my fellow Slope-a-Dopes, the train tracks are no longer heading straight up the mountain, but rather will undulate up & down as we travel around the mountainside, until we finally reach the other side of the mountain, at which point, we will encounter a treacherous cliff. What will our reliable steadfast conductor do then? Inquiring minds want to know.
Beware Evil Plan 43.0, it's off the rails………….
BDI SOH's Idiot Savant