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Stock World Weekly: Convergence of Trouble
Here's the new Stock World Weekly: Convergence of Trouble
Excerpt:
Lee Adler of The Wall Street Examiner wrote last week, “The market sailed through a week of light Treasury supply with reduced POMO support. A big Treasury paydown this week put extra cash in dealer trading accounts and it did exactly what we expected it to. S&P threw a little glitch into things on Monday by putting the US on a negative watch. They probably just had a big client with a huge buy order outstanding. A little negative news and Voila! Done!
Next week, Lee thinks, will be a little more interesting. “POMO will be insufficient to absorb $52 billion in new supply. With that much paper to sell, the government will want to see yields lower. So be on the lookout for a 3 AM stock futures selloff in the pre market probably Tuesday and/or Wednesday. There’s nothing like a little stock market liquidation to get a buying panic going in Treasuries. If that doesn’t happen, then something will need to take a hit around May 2. That’s settlement day for $45 billion in new notes. We would need to keep an eye on the technicals for clues to which market would bear the brunt of that if there’s no pre auction liquidation of stocks.” (The Wall Street Examiner, subscription required)
Quantitative easing (QE2) is scheduled to expire at the end of June. In a recent interview with Jon Hilsenrath of the Wall Street Journal, Fed Chairman Ben Bernanke indicated that QE will not be pursued once the current program runs its course. In an interview with John Nyaradi of Wall Street Sector Selector, Phil pointed out that this is not actually the case. “QE2 isn’t going to end. This is a misnomer about QE2 because what’s going to end is the new funding. About 50% of what’s going in from the Fed now is rollover money... (The Fed) is buying 85% of the Treasury notes. They can’t stop. How could they stop? Who’s going to buy?”
When QE2 was announced, the budget for the program was set at $600Bn plus additional funds made available by reinvesting principal payments from agency debt and agency mortgage-backed securities. Those additional funds boosted the total budget for QE2 to somewhere between $850Bn to $900Bn. In other words, the Fed had between $250Bn and $300Bn available to use for buying Treasuries during QE2, funds made available from the performance of assets it owned at that time. Imagine how much more could be available to the Fed once it has completed purchasing another $850Bn to $900Bn worth of assets by the end of June?
So where does this end? In Phil’s opinion, it will eventually end in hyperinflation. “There’s no end game to what we’re doing other than hyperinflation because we have to pay off our debt ultimately. Look at how ridiculous it is. We owe $15 trillion. And we go another $1.5 trillion into debt every year.” There’s no chance to pay off a $15 trillion dollar debt by adding another $1.5 trillion in debt each year. At this rate, in ten years, we’ll owe $30 trillion.
According to Phil, “There’s no realistic way to pay off this debt other than gross inflation. That means we need inflation, and it has to be hyperinflation because the inflation has to occur faster than our debts are mounting.” So we have to grow the GDP so fast through inflation that it dwarfs the rising interest rates on the debt that we have. Then, with devalued Dollars, “we may be able to start making some payments.” (Phil Davis Discusses Options and Today’s Markets)
Jesse, at Jesse’s Cafe Americain argues that many years of stagflation is a likely outcome of the Fed’s 'managed inflation' policy. “The problem or twist this time around comes when the monetary stimulus does not increase jobs and the median wages, because of some inherent and unreformed tendency in the economy to focus money creation and its benefits to a narrow portion of the populace. The result of this is stagflation which although not indefinitely sustainable can be maintained for decades.” Whatever the flationary route, Jesse concludes, “the reissue of the dollar with a few zeros gone is inevitable.”
This week’s newsletter trade idea comes from Pharmboy,... read on.
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Popo, I have reasoned similarly. I believe the oil price spike has already begun, and the fact that interests rates cannot go down anymore, would certainly indicate the likelihood of direction of the next rate cycle. Up.
Should the question be "How high up?" - then that depends a lot on perception. And of course, the extent of the debt (multi trillions being quite high indeed) may readily inflame that perception. Investors and speculators do indeed take the cycles to extremes in many cases, but not necessarily always. As long as the US maintains it supreme role as a strong military enforcer of transmissions such as petrodollars, then the money cartel Federal Reserve have input variables (somewhat). An argument can be made that the timing of the collapse of petrodollars in the 80's was one of the daggers that crumbled the Soviet regime. True?
Meanwhile, the government(s) propaganda machine economic indicators report bogus data, that keeps investors bewildered as to making sharp decisions. Except those of us who use our common sense, our own perceptions and wisdom.
Key is not to expect to be right on target, allow ourselves to miss the mark somewhat. But get on the correct side of the change.
Are you really that ignorant, or do you just like playing Devil's advocate for the Hell of it?
Interest rates anywhere close to those of the early 1980s today would wildly balloon the federal government's payments on the debt, explode the federal budget deficit and net federal debt astronomically, and very rapidly if not almost instantly thereby destroy the value of the US dollar, leading to a wholesale currency crisis and likely collapse. Of course, NOT raising interest rates will also eventually and equally destroy the US dollar --- the Fed has painted itself, and us, and the dollar, into a corner from which there is no escape without a GREAT deal of mess and misery.
In your experience which problems are addressed first by the Federal government:
a) Immediate concerns
b) Distant concerns
The oil price spike will be instantaneously debilitating. The debt will not -- except that it will force the market to demand higher rates. Both forces will slam rates sky high.
For you, who are so fond of pointing to historical examples -- the record here is clear: Rates will soar.
Well, if you indeed believe that thesis --- and I am not necessarily arguing with it --- then you have to accept that the US federal budget deficit is doomed to explode far beyond even the levels of today, as the percentage of the federal budget necessary to pay interest on the outstanding debt explodes upward, destroying confidence in the US dollar in the process and leading to a major currency crisis and potential collapse. What part of this collapsing currency situation sounds "deflationary" to you?
Yes, and it seems that unless investors have a common understanding and reasonably on the same page as to the real rate of inflation ( on a % annual basis), that interest rates metrics and determining what real interest actually is, can keep many of us second guessing ourselves as investors.
Is that a given and accepted?
Yes, I think that is a given.
Hence all the efforts by the US government through the BLS to wildly manipulate downward (always downward!) the official CPI figures on inflation, and the rampant propaganda campaign waged by the Fed, many government officials, and the corporate-controlled media such as CNBC to constantly repeat and disseminate those woefully inaccurate, misleading and downright false figures on inflation --- which should honestly be simply called "currency depreciation" instead. But anyone who has one functioning eye, half a brain and any observational skills whatsoever as a consumer knows full well that those official CPI figures are nothing but a joke and a lie.
Rates weren't "raised" they were "driven" up. The illusion of absolute control is a large part (then and today) of Fed spin.
Popo, yes, this seems to be spot on. If the Fed had absolute control, it wouldn't have taken so long to get the mechanism into balance, is that correct?
The answer is part policy and partly the general unpredictability of global financial markets.
In the 1970's there were a series of "unpredictable" events affecting the oil market (although Taleb might take issue with their "predictability"), from the Yom Kippur war embargo to the fall of the Shah, to the Iran/Iraq war.
Global oil and gas supply disruptions led to two outcomes: increased oil prices which threatened American stability, and **increased perception of risk** which led to **market** demand for higher rates.
Both factors (and several others) forced the Fed's hand.
ie: The Fed was forced to raise rates.
Inflationists are the ones who must answer why they believe this time it's different.
ahh, "peception of risk" - yes, that is quite difficult for any money cartel like the Fed to attempt to manage. Even if they control the military supported fiat currency in a supply and demand sense, they still must handle the PR of perception adeptly.
You have educated me on that time in history and made some things clearer for me. Thanks.
"all" I have? LOL. You still haven't addressed anything: wages, input costs, M2, employment, petrodollars, bond markets, military resource-control, continued deleveraging, economic differences between the US and the failed states you mention, etc.
All you do is keep saying the same thing, and accusing *me* of not making any arguments.
I've made dozens. You've made one.
The horse is dead, son. Put down your club.
I have hundreds if not thousands of consistent financial and monetary history on my side.
You have an overextended American military (and its dubious relevance) and Ben Bernanke on yours.
Let others decide in which to put their faith.
Just for laughs, please address: wages, input costs and M2.
Go for it big guy. Pick up the gauntlet. I know you can do it.
I do not need to, and find your raising of irrelevant minutia as some kind of smokescreen annoying and insulting.
Again, I have thousands of years of consistent monetary history upon which to rely ---- you have Ben Bernanke. I am very comfortable in the decisions I have taken to protect my savings from the inevitable outcome of the current disastrous financial, fiscal and monetary environment --- can you say the same about your own, deflationista?
That's what I thought.
LOL.
I am glad you have taken this opportunity this evening to demonstrate your historical cluelessness, your monetary ignorance and your near-complete disingenuosity, which only mirrors that of all the others propagandists of deflation with whom I have come into contact. That alone speaks volumes about your intellectual and moral integrity, about the soundness of your theories (or the lack thereof), and about your possible motives and agendas.
Reduced to ad hominem, eh?
Fail
No, just an honest and objective summation of the intellectual and personal flaws which you have demonstrated in this exchange. I will let others, however, be the ultimate arbiters.
That is probably the single most incorrect, historically ignorant and profoundly idiotic statement I have ever read in this forum. You clearly have no knowledge of ANY monetary history from just the last 20 years, much less the last century. I am sure that the citizens of Zimbabwe, Russia, Peru, Mexico, Yugoslavia, Turkey, Argentina, Brazil, Zambia, Angola, Mozambique, Bolivia, Ecuador, and many other nations will be just thrilled to learn that, according to you, their hyperinflations and currency collapses, and the corresponding theft of their hard-earned savings and diminutions in their standards of living, did not REALLY happen, but were "self-limited".
I have to imagine that such a fundamentally clueless and absurd statement is the result of trying to peddle an ideology or agenda (Prechterite deflationary flat-earthism, perhaps?) rather than a desire to participate in an intelligent discussion.
Back to ZeroHedge special ed for you!
Funny how the two who junked this commonsensical and historically irrefutable argument refused to attempt to rebut it. Deflationists, though, are nothing if not cowards (not to mention irredeemable idiots).
If you had to categorize one of the following as the "weak force" and one as the "strong force" how would you do so:
1) The Federal Reserve
2) The bond market
That's quite the question. I got to think on that. I answered it "it depends". Prior, I was inclinded to answer it Federal Reserve. But I realized that during the 70's, petrodollars were in fact a stronger force than money cartel "Federal Reserve" dollars. So at that time, the bond market was a stronger force.
Does that make sense to you Popo? Do you get where my thinking is on that thread?
What are your thoughts on this? I would much like to listen to your perspective.
LOL. Zambia? Angola? Mozambique? Which one of those nations was the most powerful nation in history?
For the "fiat" whining crowd who believe the US Dollar is backed by "nothing", I'd like to point out the patently obvious:
Control of the world's resources is the name of the game. He who controls the oil, controls the world. It is deeply politically incorrect to say it, but America controls the oil via a network of military bases, puppet governments and a miliarily enforced petrodollar system.
That system has not changed. In fact, the military reach of America has increased to a third front.
To say that the dollar is backed by "nothing", or to compare America to Zimbabwe is to be in denial of the nature of the empire in which you live.
America is a military empire. You can complain about it from a moral standpoint -- and I would be the first to agree, there is much to complain about there. But that won't change the completely obvious reality of the situation. The American military is the most powerful military in history -- by far. One does not simply dismiss that as an irrelevant detail when summarizing the economic and geopolitical balance of power. Drawing comparisons to Zambia, Mozambique, Ecuador and Zimbabwe is nothing short of laughable.
The value of the dollar is not supported by industry, and has not been for a very long time.
Two words for you...Roman Empire. Do your history
I am quite deeply aware of history, thank you. (Why the attempts at condecension around here? ZH'ers believe themselves to be in possession of some rare knowledge apparently). The Roman and British Empires are bad examples, although frrequently cited. The currency regimes of both empires were not enforced through a system similar to the petrodollar system. (If you had mentioned the Ottomans, I'd be listening more closely)
It is no coincidence that Saddaam Hussein announced his intention to sell oil in Euros, and America invaded within a few months.
The game is oil. The dollar support mechanism is petrodollars. And the enforcement mechanism is the American military. Period.
Why are *those* things never discussed here?
For those who junked: (Note the date)
http://archives.cnn.com/2000/WORLD/meast/10/30/iraq.un.euro.reut/
... Res ipsa loquitur
Popo, a brilliant link indeed. It was an economic missle fired right at the Military Industrial USA enterprise. A signal that Iraq was prepared to hit the USA at their sensitive spot. Control of 'petrodollars' hegemony.
Indeed, " Res ipsa loquitur"
Well said.
Popo is correct, the game is oil, and the dollar support mechanism is petrodollars and the enforcement mechanism is the American military.
The new wave political volatility in the GCC / North Africa region has just turned the heat up together with all the other dynamics and catalysts in the brew.
The folly is assuming that the money cartel "Federal Reserve" would be able to manage all these I/Os as if they had the magic formula and timing.
Popo, you have the logic of the situation exactly backward.
It is not the US military that stands behind the unsustainable fiat dollar --- it is the fiat dollar that stands behind the overextended, equally unsustainable American military and overseas empire. Just skim over your Roman, British, French, or Russian imperial history; when the military bills could no longer be paid, the troops were brought home, or dispersed to (relatively) greener pastures. It will be no different with the USA.
It is only the USA's "exhorbitant priviledge" of paying our way for decades with fundamentally worthless IOUs that has allowed us to build up such a disproportionate, unjustified and unsustainable foreign military presence. Well, that which is unsustainable is by definition that which will not be sustained, and I, among many Americans, will cheer when the US imperial overseas empire and overextended military presence is ended.
>"It is not the US military that stands behind the unsustainable fiat dollar --- it is the fiat dollar that stands behind the overextended, equally unsustainable American military and overseas empire."
I completely disagree. It is control of the world's oil resources that supports the dollar, and has been for some time.
Believe as you wish. Blind repetition of baseless assertions do not a fact make.
If military power alone commanded economic pre-eminence, then the USSR would still be one of the two world superpowers. I cannot help but notice, however, that that is no longer the case.
Absolutely incorrect assertion.
In a capitalist system, military expansion is stimulus.
In a socialist system, military expansion traverses the ledger line.
Furthermore, because of the inherent incentive failures in socialism, the USSR failed (deeply) to access its own energy reserves -- let alone expand geographically in search of new energy sources.
The currency never traded (and so the entire nation traded with great difficulty) and its efforts at internal, self-sufficiency failed.
There is no blind repetition here. There are no baseless assertions.
But please note: I am not at *all* ruling out the possibility of hyperinflation. I am simply pointing out that those who believe that it is "obvious" or "must happen" are the ones who are exhibiting all the qualities of religious zealots and engaging in "blind repetition".
Why do you deflationary flat-earthers just LOVE to insist that hyperinflation is the ONLY possible alternative outcome to your putative (and NEVER before seen) fiat currency deflation? I for one have NEVER suggested hyperinflation as the definite or likely outcome of the current fiscal-economic insanity --- I admit it as a distinct possibility, but I think that it is much more likely that we will have an Argentinian outcome a la 2001 --- a currency crisis followed by a 50-75% devaluation of the US dollar (and probably a similar devaluation in most or all other world currencies), or failing that, a prolonged period of high but not hyper inflation, on the order of 20-30% annually for several years. Please stop positing false dichotomies, and throwing out red herrings.
Oh please Akak.
"deflationary flat-earthers"?
Which one of us is attempting to tarnish the others' argument with irrelevant subjects?
If the illusory shoe fits ....
Bond holders may write down some of the 15 trillion if commodity price increases do more damage to local economies and future value of remaining bonds.
Exactly. And then where do rates go?