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FX Concepts' John Taylor On The Equity Endgame: "Extension Of Equity And Economic Strength Beyond June Unlikely"

Tyler Durden's picture


Some Thoughts on the Equity Endgame

February 17, 2011
By John R. Taylor, CIO
FX Concepts

In the financial markets, the 'new normal' is
beginning to look just like the old normal: junk bond spreads are
approaching the lows of the last decade, 'covenant lite' deals are back
in vogue, equity valuations are sky high, and financial gearing is
headed to the stratosphere. Although this bubble-like activity is a sign
that those rational men and women who wished to reform and fortify the
institutions so critical to global well-being failed, this reversal to
the madcap form of the mid-2000's has allowed growth to accelerate
toward the levels of the mid-1990's. The recent good news, everywhere
outside of the European periphery, seems to be enough to lock the
financial cycles into the general form that has dominated since the end
of World War II. We had seen the financial wreckage and losses from the
events of 2007 and 2008 as too severe to allow this growth cycle to
continue. We were wrong — or at least 75% wrong. What makes us still
25% right is that the next recession, coming sooner than most pundits
think, will be precipitated without a significant increase in interest
rates, which is totally different than any other post-war cycle
. Despite
decent economic growth and extreme market optimism, this cycle is
crippled as the banking and government issues supporting the monetary
expansion necessary for GDP growth have either no capital base or no
taxing ability and no further deficit spending power.

The world owes Ben Bernanke for this reversion to form. Last
summer our leading indicators and cycles pointed to the start of a new
financial decline, probably associated with an economic one as well, but
the Jackson Hole speech at the end of August stopped that decline dead
in its tracks. Late last July, I wrote (The Rally Is Ending, July 29)
that the world economies would be entering a new recession in the next
few months and they were ill-prepared for this event. As the QE2
strategy, plus the December Obama-Republican agreement to extend the
Bush tax cuts, expand unemployment benefits, give tax credits to
business, pumped money into the economy and added roughly a quarter
trillion dollars to the already bloated government deficit, the economy
perked up, not only in the US but everywhere else as well. Now the
long-term cycles look to be exactly on track. Commodity prices are
climbing, inflation is a troubling factor in many countries, and
bottlenecks are appearing. Although it does not look as though the US
will raise rates in this economic cycle — the end of QE2 should be
enough to do the trick — the endgame is approaching. The government
curve beyond the first year or so is being priced for higher rates, (the
yen is weakening as a result) raising the hurdle for equity prices,
investment projects, and house prices as well. Commodity prices and
labor costs have impacted the emerging exporters and will threaten their
growth. If this cycle has some similarity with the one in 1994, as we
mentioned last week, commodity prices should continue to climb even
though the equity market is declining and the bond market is in
shambles. Back then gold peaked many months before equities, as it has
now, and did not surpass that high for more than 2% years. Because this
cycle is now passing so many of the same signposts that the previous
ones did, we feel comfortable about the future. Gold peaked in December,
but silver and the other commodities won't top this year unless the
next recession starts quickly — and aggressively. Equities look as
though they will see two tops, just like they did in 2007. The first of
them is likely in March with the second in June, but it is not clear
which countries will peak when, or what the intermediate months will
looks like. The strong commodity markets and continuing QE2 should keep
the dollar under pressure into June, except possibly in Europe where the
shorter cycles are arguing for a euro high in March. As the
Republican House of Representatives and the fiscal gridlock in
Washington will keep Bernanke and Obama in check, an extension of equity
and economic strength beyond June looks very unlikely.


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Thu, 02/17/2011 - 10:51 | Link to Comment Oh regional Indian
Oh regional Indian's picture

Feb 28th first shock.

October 28th last shock.

Mayhem in the middle. June is just a waypoint.


Thu, 02/17/2011 - 12:03 | Link to Comment markmotive
markmotive's picture

According to Gary Shilling it will be a hard landing in China that sends everything plummeting again.

Thu, 02/17/2011 - 10:54 | Link to Comment johnQpublic
johnQpublic's picture

oct 28th

i had that date in mind for about 18 months now


do you read HpH or urban survival?

Thu, 02/17/2011 - 10:59 | Link to Comment Oh regional Indian
Oh regional Indian's picture

HpH, Does he have that date as critical?

Terrance MCkenna's Timewave Zero also has that date or somethign close.


Thu, 02/17/2011 - 11:38 | Link to Comment johnQpublic
johnQpublic's picture

dont know if he has it as exactly critical, but that date has been coming up for 18 months now in their work


i've had the thought that people are far more 'mobile' in spring/summer, so if something really bad is to be staged it must be in fall

harder to live/survive in fall going on winter

Thu, 02/17/2011 - 10:55 | Link to Comment SheepDog-One
SheepDog-One's picture

What? Hes not employing the standard 'apply ruler to present Bernank equity ramp, draw straight up line thru next 3 years' standard market prediction technique?

Thu, 02/17/2011 - 11:58 | Link to Comment Founders Keeper
Founders Keeper's picture

[What? Hes not employing the standard 'apply ruler to present Bernank equity ramp, draw straight up line thru next 3 years' standard market prediction technique?]---SheepDog-One

Hi SheepDog.

Funny, that equity ruler. Mine keeps pointing straight down.


Thu, 02/17/2011 - 10:55 | Link to Comment Ivanovich
Ivanovich's picture

Until QE3

Thu, 02/17/2011 - 11:01 | Link to Comment Turd Ferguson
Turd Ferguson's picture

This simply sounds like a coded message begging for more QE.

Well guess what,'re gonna get it!!!

Thu, 02/17/2011 - 12:28 | Link to Comment Rich V
Rich V's picture

Crack addict Ben can't stop, the withdrawal pain will be avoided at all cost.

Thu, 02/17/2011 - 11:11 | Link to Comment r101958
r101958's picture

It is a misnomer to call what we are seeing in the economy now a 'recovery'. It is debt driven GDP inflation which we can not afford to repay.

Thu, 02/17/2011 - 11:13 | Link to Comment c-rev with a twist
c-rev with a twist's picture

These kind of sweeping analyses always ignore the fundamental question:  With an annual deficit of 1.5 trillion, how can the Fed cease what it's doing without causing a government default?

Thu, 02/17/2011 - 11:17 | Link to Comment Lone Mad Minute...
Lone Mad Minute Medic's picture

All I want to know is when the end comes will there be an ETF?

Thu, 02/17/2011 - 12:16 | Link to Comment Rogerwilco
Rogerwilco's picture

No, but there will be a systemic FU for BTFD "investors" that answers the question "Daddy, what's a reset and new currency regime?"

Thu, 02/17/2011 - 11:19 | Link to Comment NOTW777
NOTW777's picture

"As the Republican House of Representatives and the fiscal gridlock in Washington will keep Bernanke and Obama in check, an extension of equity and economic strength beyond June looks very unlikely."

so he equates madman bens reckless spending as "economic strength?"
Select ratingCancel ratingPoorOkayGoodGreatAwesome

Thu, 02/17/2011 - 11:19 | Link to Comment Big Corked Boots
Big Corked Boots's picture

Sell in May and go away?


Thu, 02/17/2011 - 11:24 | Link to Comment Johnny Lawrence
Johnny Lawrence's picture

Eat shit, buy the dip

Thu, 02/17/2011 - 11:24 | Link to Comment MakeMineADouble
MakeMineADouble's picture

Off Topic:

National Enquirer: Apple's Steve Jobs Is Terminally Ill



Thu, 02/17/2011 - 13:37 | Link to Comment JustPrintMoreDuh
JustPrintMoreDuh's picture

Who would have guessed?  I mean the guy looks great doesn't he?

Thu, 02/17/2011 - 11:27 | Link to Comment killben
killben's picture

Come on Ben, get going on QE NOW!.. you can't let America down. You ARE THE ONLY ONE who can save it .

Thu, 02/17/2011 - 12:06 | Link to Comment Founders Keeper
Founders Keeper's picture

[Come on Ben, get going on QE NOW!.. you can't let America down. You ARE THE ONLY ONE who can save it .]---killben

"Ben-Ackinobie, you're our only hope."


Thu, 02/17/2011 - 11:28 | Link to Comment Ancona
Ancona's picture

Gold and silver.......I'm just saying...

Thu, 02/17/2011 - 11:36 | Link to Comment TradingJoe
TradingJoe's picture

Many great manager have called tops in the past, they all failed, since no one knows when the printing will stop, and why?

Politicians will, by default, do what preserves THEIR POWER, once the status quo, between WS and DC is not sustainable any longer, guess who will "GO INTO THE SUNSET"?!

If QE3 is politically "sustainable" it will come, otherwise...! Use your imagination!

Thu, 02/17/2011 - 12:09 | Link to Comment karzai_luver
karzai_luver's picture

Nothing serious that can cause a grimace to the 10% that elect the TOTUS and the other lackies will happen before the next selection.


The TOTUS and the rest of those cretins in DC have campaigns to fund and neither will want to have any chance to be blamed for something they did that caused the next calamity.


There will be QE whatever or whatever other manner of stealth bailouts as required to keep the heads above water.


After the next selection then all bets maybe off, especially if the current scum TOTUS gets back in.


I can't imagine the few that vote being that insane, but he got selected the last time.


Thu, 02/17/2011 - 11:42 | Link to Comment Mr Sceptical
Mr Sceptical's picture


Thu, 02/17/2011 - 11:44 | Link to Comment oh_bama
oh_bama's picture

HE forgot one important condition for his conclusion

If there is no more QEs, then...






Thu, 02/17/2011 - 12:27 | Link to Comment Rogerwilco
Rogerwilco's picture

I hear they're going to string up a big banner across Wall Street that reads:

BTFD macht frei

Some kind of multicultural celebration or somethin'

Thu, 02/17/2011 - 11:45 | Link to Comment ruffian
ruffian's picture

this guy is as good a contarian indicator as GS

Thu, 02/17/2011 - 12:00 | Link to Comment apberusdisvet
apberusdisvet's picture

Martin Armstrong has June 13 as a "significant" date.

Thu, 02/17/2011 - 12:03 | Link to Comment Lord Peter Pipsqueak
Lord Peter Pipsqueak's picture

Conclusion:There won't be any QE111 until there is,until then btfd.

Thu, 02/17/2011 - 12:13 | Link to Comment Zeilschip
Zeilschip's picture

Tyler, what's going on in ES at 1333.00-1333.50?? Someone dumping ES in size?

Thu, 02/17/2011 - 13:03 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

This guy is 100% correct, the end of QE2 will crash both the markets and this phony nominal recovery, it did start last spring with the end of QE1, but was interrupted when Benocide started printing again.

Weimar or GD2, Ben's choice, but there is no, and will be no, real recovery without substantial reforms.  Sorry Ben, but stoking "animal spirits" just ain't gonna do it.

Thu, 02/17/2011 - 13:25 | Link to Comment cosmictrainwreck
cosmictrainwreck's picture

well, they missed their NEW 52-week high by a lousy 76/100 of a Dow point at 11:30. pussies. somebody get Jamie on the phone

Thu, 02/17/2011 - 13:45 | Link to Comment Saxxon
Saxxon's picture

ORI; you study McKenna as well as Gurdjieff; excellent sources.  Is Gurdjieff respected in India?

Thu, 02/17/2011 - 14:15 | Link to Comment Oh regional Indian
Oh regional Indian's picture

Saxxon, not so well known here. Only to a very ecclectic set.
But yes, fascinating sources, both, eh?
I got a start to my Gurdjieffication a tad north of the GG bridge, amongst some of the wisest neo-hippies I ever met, in the freest environment I had ever encountered, at the financially brokest, otherwise richest phase of my life. Created a deep impression, as you can imagine.

Thu, 02/17/2011 - 21:04 | Link to Comment sschu
sschu's picture

IMHO, in the end the American people and the PTB would rather have inflation than deflation, so one should expect renewed QE after a short respite.

Of course this either leads to extended stagflation or hyper-inflation, but it kicks the can down the road.  At some point either a new Volker shows up to squeeze the mal-investment out of the economy or a black-swan type event causes the USD to fail. 

Anyone remember 20% interest rates in 1980?  I sure do.



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