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What Do Stocks Get That Credit and Bonds Don't?
I’m sick of writing about Europe. The entire situation over there is such a complete and total disaster that you could literally write a 12-volume set about it. So let’s forget about it for a while and look at something else which is only slightly less depressing… the rest of the world.
A reporter called me the other day to tell me that famed Wharton School professor Jeremy Siegel argues there’s a 50 percent chance — or better — of the Dow tipping 17,000 by the time the president takes the oath of office. The reporter wanted to know my thoughts on this.
Aside from the fact that this kind forecast is totally worthless (what’s the other 50% chance outcome? That the Dow goes to 1,000?) I cannot for the life of me understand where all this bullishness is coming from. Do people simply not bother reading the news or engaging with reality anymore?
What’s reality? Here’s reality.
The US is clearly heading into another recession in the context of a larger depression. And it’s doing this while in the worst economic shape in its post-WWII history.
We’ve never once entered a recession when the average duration of unemployment is at an all time high, industrial production has failed to break above its previous peak, and food stamp usage is at a record high. We’ve never done this.
We’re doing it now.
And this is happening at a time when the Federal Reserve is out of ammo. I realize that 99% of so called “analysts” claim that the Fed and the rest of the world’s Central Banks will unveil some sort of stimulus to save us… but these folks are either talking their books or have no clue about how the financial system works.
My questions to anyone who says that money printing or more QE will help us:
- We’ve already seen massive central bank coordinated interventions… they all failed (September 2011, November 2011, July 2012). What makes this time different?
- QE 1, QE lite and QE 2 have spent in the ballpark of $3 trillion. That’s roughly 20% of the US’s GDP and we’ve had the weakest economic recovery in the post-WWII era… how would more QE help?
And finally, the real question, which will prove that the QE crowd doesn’t understand the global financial system…
- How would buying Treasuries or other sovereign bonds… thereby sucking collateral out of the system… help an already insolvent banking system (the world’s $700 trillion derivatives market is backstopped by Treasuries and other senior assets)?
Here’s another point to bring up with any “expert” who claims QE is the answer…
The Too Big to Fails, the very banks which the Fed has done everything in its power to prop up, have over $200 trillion in derivative trades… backstopped by only $7.12 trillion in assets.
How would buying Treasuries or other assets from these banks help them?
Just a thought. Maybe one “analysts” should actually think about rather than mindlessly blathering about how QE is just around the corner… like they have for over a year now.
And this is completely and totally ignoring Europe, which is honestly on its way to breaking up if not a full-scale systemic collapse. Then of course there’s Japan whose own debt implosion is about to begin. And finally, China, the “miracle” where LEI, electricity production and oil demand are all rolling over indicating a recession.
Oh, and I almost forgot, even “officials” in China admit the economic numbers coming out of the country are nonsense.
Chinese Data Mask Depth of Slowdown, Executives Say
Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said.
Electricity production and consumption have been considered a telltale sign of a wide variety of economic activity. They are widely viewed by foreign investors and even some Chinese officials as the gold standard for measuring what is really happening in the country’s economy, because the gathering and reporting of data in China is not considered as reliable as it is in many countries.
Indeed, officials in some cities and provinces are also overstating economic output, corporate revenue, corporate profits and tax receipts, the corporate executives and economists said. The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist.
The executives and economists roughly estimated that the effect of the inaccurate statistics was to falsely inflate a variety of economic indicators by 1 or 2 percentage points. That may be enough to make very bad economic news look merely bad. The executives and economists requested anonymity for fear of jeopardizing their relationship with the Chinese authorities, on whom they depend for data and business deals.
So… the US is entering a recession. Europe is imploding. Japan is imploding. And China is entering a recession.
And yet, somehow out of all of this, the stock market will explode higher because the Central Banks have got some secret trick hidden up their sleeves… something that will magically solve the world’s problems? Are people forgetting that the ECB along with the IMF AND Germany couldn’t solve Greece’s problems in TWO YEARS!?!
Seriously, think about that for a moment… the ECB… with the IMF… and Germany’s help… couldn’t save GREECE.
And these are the people we’re planning on saving the world economy?
God help us. Dow 17,000?
So if you’re not already taking steps to prepare for the coming collapse, you need to do so now. I recently published a report showing investors how to prepare for this. It’s called Surviving a Crisis Four Times Worse Than 2008 and it’s chock full of information on how to not only survive but thrive during if this particular black swan (or any of the others lurking in the system) comes to pass.
This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com under the OUR FREE REPORTS tab.
Good Investing!
Graham Summers
PS. We also feature four other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.
And ALL of this is available for FREE under the OUR FREE REPORTS tab at: http://www.gainspainscapital.com
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Germans will demand the PIIGS reduce their deficits
The market (since Draghi's promise) doesn't seem to grasp that this bond buying is at best going to be coupled with depressionary austerity on the PIIGS.
Draghi and Merkel have both stated that the bond buying will come with strict conditionality. See my prior comment for more details.
The market is hoping for some kind of unlimited bond buying that can cause a bounce in growth in Europe and the globe. But this has never been the proposal. The proposal is merely to mitigate the spread between the core and PIIGS sovereign bonds, together with conditions that the PIIGS must reduce their deficits (driving massive unemployment and depression through Europe).
Thus the interest rates of the core will begin to rise as this plan is put into effect. This will allow the interest rates of the PIIGS to continue to rise, while the plan holds the spread from widening too much.
The ECB has not been proposing to solve the unemployment problem or deal with the implosion of growth of Europe! Draghi and Merkel have both stated that the purpose is to do everything to save the Euro, with no mention of saving growth or employment.
http://www.cnbc.com/id/48687459
Just short cash, fiat, USD's and you have it nailed. What is the inverse of shorting cash? You go long cash; buy currency in the face of shameless debasement. Stocks are rising because we are in the United States of Zimbabwe, where stocks went up 38,000% against a 48,000% inflation rate.
Illogical comparison.
The Bernanke put has conditioned you to think that USA and Europe are Zimbabwe, but you forget the Americans have guns. There is a political cost to hyperinflation. Besides it is very difficult to hyperinflate all fiats of the world simultaneously, without disrupting the entire global economy (think massive starvation), because it means the only currency to flight are precious metals and the entire debt-based economy stops. It is orders-of-magnitude easier to hyperinflate a small country, such as Zimbabwe or Argentina, because there are many options for flight.
http://www.youtube.com/watch?v=7MWToEg92PQ
The key macro reason why QE is failing is the declining marginal utility of debt (click to see chart).
In other words, when excessive debt causes massive waste and duplication, because false demand is stimulated, it actually destroys capital. Working-class Chinese live in dungeons surrounded by unoccupied high-rise condos. These are a specific example of a more general scientific phenomenon known as decreasing degrees-of-freedom (a futile exponential ramp against the 2nd Law of Thermodynamics and Coase's Theorem).
ZeroHedge has been documenting the proof that central banks have reached the point where they can't create new debt without causing massive inflationary problems. Fed drives inflation expectations over 2.5% just by hinting they are open to doing QE later. China won't reignite their housing bubble nor even ease much due to rising food prices.
Although the ECB is going to buy bonds on the secondary market, these have to be bought on the primary market with money that has to come from the sovereigns of Europe via the ESM. The AAA core of Europe (Germany, Finland, etc) are not going to allow printing beyond the minimum necessary to enforce massive austerity and fiscal discipline. Today Merkel said Europe must emulate Canada's fiscal discipline, and that ECB's Bond buying will come with strict conditionality. So while Europe is going to do enough to hold the union together, they will do this in the context of creating a massive depression over the whole of Europe.
So bond rates will be held down, as long as Europe agrees to cut deficits and plunge their economies into a depression. But then the deficits will increase due to lost tax revenues. So then more budget cuts and more tax raises. A vicious cycle to the bottom.
Today Bloomberg reports that Bankia won't be allowed to borrow more, and the bailout has to be put on the Spanish sovereign balance sheet, for which Spain will need to request an emergency tranch of 30 billion euros from the ESFS (which only has 65 billion remaining). The squeeze continues-- the ECB plan is not pro-growth in any manner. Corporate earnings will plummet, so will the stock markets.
Btw, I don't understand why so many analysts think Europe is going to breakup. I was writing this in public the last time everyone thought Greece was going to exit. The Europeans don't want to leave the Euro. The Germans I've talked to want the PIIGS to follow the rules, and absolutely do not want to leave the Euro. The PIIGS want the benefits they've gained under the Euro. There is no will to breakup. The politics are precisely designed (I assert by the globalists) to insure a fiscal union (loss of nation-state sovereignty) as a result of the depression. Majority of Europeans are born and bred as socialist collectivists (e.g. lifetime government jobs even in Germany), so why think that a crisis suddenly converts them to libertarians?
The coming cratering of the global economy is going to blindside those who think the storm has passed or can be sustained with Central Bank fairy dust that PULLS on the string of negative marginal utility of debt (printed paper can't make a real economy, it is short-term drug that fails and that failure is now when the MUOD goes negative globally).
Any one care to summarize all the negative indicators showing the US is entering recession? I will go collect mine.
Negative REAL interest rates are always inflationary for anything that is not financed with debt. Study any historical chart you like. Think about why that must be so. Hint: a negative REAL interest rate is not a market rate (no one is loaning money at that rate). Listen to John Stockton's interview with Alex Daley of CaseyResearch.
So any thing not financed, e.g. food consumption, gold, silver, basic costs of life up (inflation).
Financed economy down and defaults (deflation).
Note that China is a capital investment debt bubble, so industrial commodities down (deflation).
The point of negative M.U.O.D. in the above context, is that printing more money will actually cause the economy to decline faster. Each bounce up is going to be shorter in duration, which is what we see happening in reality with each successive QE2, LTRO2, etc..
Eventually it will reach the point that printing causes everything to go down immediately. That should cause a market stampede.
I believe the central banks are aware that they are losing ammunition and that is why they are holding off as long as they can.
In Europe's case, the plan is evidently to blame the failure on the need to restore fiscal discipline (this fits with the collectivist pyschology of Europe).
In USA's case, the politics are more diversified, because there are still many "take my gun from cold dead hand", libertarians, etc. mixed in with the socialist majority. I expect the implosion (failure of the Fed) will be blamed on Europe and China's implosions. It will be revealed that China was lying and their growth was never 10% in reality and that their debt ratios are worse than Greece. The collectivism of Europe will be blamed, etc.. Perhaps even Iran will be blamed, and the Middle East revolutions, if this causes supply of oil to be shut off.
In China's case, the extreme nationalism political card must be played. In Japan, the xenophobic (anti-change) political card must be played. Etc...
This story is emblematic of much I read here, especially in the comment sections.
When you make your economic predictions based on what you WANT to see happen, your chances of accuracy are random at best.
So then explain your bullishness---bulltard.....Same reasoning...
Rev 18:11 And the merchants of the earth shall weep and mourn over her; for no man buyeth their merchandise any more:
Rev 18:12 The merchandise of gold, and silver, and precious stones, and of pearls, and fine linen, and purple, and silk, and scarlet, and all thyine wood, and all manner vessels of ivory, and all manner vessels of most precious wood, and of brass, and iron, and marble,
Rev 18:13 And cinnamon, and odours, and ointments, and frankincense, and wine, and oil, and fine flour, and wheat, and beasts, and sheep, and horses, and chariots, and slaves, and souls of men.
Rev 18:14 And the fruits that thy soul lusted after are departed from thee, and all things which were dainty and goodly are departed from thee, and thou shalt find them no more at all.
Rev 18:15 The merchants of these things, which were made rich by her, shall stand afar off for the fear of her torment, weeping and wailing,
Rev 18:16 And saying, Alas, alas, that great city, that was clothed in fine linen, and purple, and scarlet, and decked with gold, and precious stones, and pearls!
Rev 18:17 For in one hour so great riches is come to nought. And every shipmaster, and all the company in ships, and sailors, and as many as trade by sea, stood afar off,
I am disputing Summers' point #3.
Sovereign bonds with certain ratings are zero-risk Tier 1 assets under Basel 1, meaning they can be used as collateral when calculating loan reserve requirements to satisfy solvency w.r.t. to regulators. (Side note: it has been proposed that Gold become a zero-risk Tier 1 asset.)
So I surmise that Summers' point is that every Tier 1 bond on a central bank's balance sheet is Tier 1 collateral removed from the already overleveraged banking system.
But does it logically follow that there is shortage of sovereign bonds for banks to purchase? I think I read that the minimum Basel Tier 1 reserve requirement is 4%. As of March 2012, there were $2.9 trillion of US Treasuries on the Fed's balance sheet. I read the global banking assets are roughly $100 trillion. So at most $2.5 trillion in sovereign bonds would be required, not just US Treasuries. There are $16 trillion of US Treasuries, available at some price. Over $1 trillion of new issuance per year. And then there are core (AAA) Europe's sovereign bonds.
I think Summers has pointed out in the past that Treasuries are also reserve assets for the central banks of the world, but the size of the global sovereign bond market is vast (didn't look up the number).
Thus it is not clear to me how another $1 trillion of QE3 bond buying is going to cause a problem of supply of Treasuries for meeting Tier 1 requirements.
Summers or his staff replied to my email and said that it is 4% of house risk-assets. I replied and said derivatives are not counted, because the banks are allowed to not mark-to-market. As his paid subscriber, I have asked him to please document his calculation justifying a potential shortage of AAA sovereign bonds.
"What Do Stocks Get That Credit and Bonds Don't?"
Illegal frontrunning virus algos crawling all over them?
"but these folks are either talking their books or have no clue about how the financial system works." uh .. actually they do very well. If you spend a whole year putting a pistol to every short on the planet this making vapor volume you can ramp the propaganda machine to the moon!! Today was another wall street gift to obama for not putting corzine in jail. The worse the news on fraud the more ramp up the market. its the "lookey over there" effect. They know damn well what they are doing.
http://www.chicagotribune.com/business/sns-rt-us-markets-stocksbre86m08n...
and like clockwork. The propaganda machine is in full retard gear. Cant get the message out to the sheeple fast enought . Why no mention of crude climbing lock step with the market? Wall street gets theirs joe six pack gets it in the rear.
Hey Graham, I heard that drunken youth are roiting in the euro zone by walking around bumming cigarettes and texting their girlfriends. Do you think that is a sign of impending economic colapse? I heard the crazaay over there!
What do any real economic facts have to do with POTUS being re-elected? That is the only thing that matters right now. The Fed and Wall Street are in his bag regardless of what they say. Up market buys votes from the common folk....IMHO.
The problem with his argument is it considers the whole population instead of applying the 80-20 rules. If we forget about the bottom 20% of society, the bottom, and look at how just the top 80% are doing, I think the economic statistics look much better. Until that bottom 20 starts disrupting business for the rest, things are getting brighter.
tired of writing about Europe.... don't fret - Japan is going to be center stage very soon.
S&P 1300ish :)
QE is any program by the Fed whereby it prints dollars to purchase assets, like Treasuries, MBSs, old toasters, etc. If it offloads an equal amount of other assets, the action is said to be "sterilized" since the Fed's balance sheet does not change. This is what Twist was about.
Unsterilized action is the stuff the Wall street boys mainline.
Please define for me the QE that you say will not happen. What is QE? Was Operation Twist 2 a QE? Is buying a truckload of MBS a QE? What is and what is not QE? Because when the Fed does decide to do QE, I don't want you slipping away by saying, "Oh, that isn't the QE I was talking about."
"I’m sick of writing about Europe"
And we are sick of reading about it.
Ditto. Get back to us at SPY 150
Graham, here is a snippet of what they are trying to do.
-- Using money supply as the primary tool for monetary policy does help debtors. The more money in circulation at a constant velocity, the less the money is worth.
-- ZIRP: low nominal spreads don't help spread lending, but low nominal rates coupled with monetary policy does reduce the financing costs for leveraged businesses / households. Look at high yield rates.
Profits are high because the cost of credit is especially low.
Of course, these are the same input conditions that led us to crisis in the first place, and somewhat similiar conditions set up the crash in 1929. But that's for another day.
King RAHRAH!
DROP A FEW BIG ONES!