No Direction Home

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No Direction Home

Featured in Market Shadows Newsletter: No Direction Home, April 11 2013

This issue took us too long to put together, and if you've been following the Market Shadows blog, you've probably seen some of the featured articles before, because we post them before creating the newsletter. To get newsletter articles immediately, visit us here

As discussed in Whether Stocks are Cheap is Besides the Point, the stock market is not "low" according to metrics commonly used to determine whether the market is underpriced or overpriced - such as P/Es. However, the context in which valuations are measured has changed dramatically since the 2008 meltdown and subsequent succession of quantitative easings, courtesy of the Federal Reserve. The Fed and other Central Banks are creating a tsunami of liquidity in a race to devalue their own currencies. This is not a minor detail; it's a game-changer in the pricing of assets. 

Discussing the Bank of Japan's monetary experiment, Chris Martenson wrote:

By now, we are all familiar with the details. Japan has initiated a program of monetary expansion that goes by the shorthand of 2-2-2. In two years, the Bank of Japan (BoJ) will fully double the monetary base as it seeks a minimum of 2% inflation.

In the aftermath of this announcement, the yen weakened by a whopping 8% against the dollar, the Nikkei stock average vaulted up by roughly 10%, and the $10 trillion Japanese government bond market had to be frozen twice because of intense volatility.

In truth, what Japan is running is as much a massive social experiment as it is a monetary experiment...

The basic formula for creating inflation involves more money and credit chasing too few goods. Whether this is more goods (just not enough to match the growth in money and credit), the same amount of goods, or even fewer goods is not important. What matters is that there is more money and credit than goods.

On this front, so far, so good. Japan is going to fully double (!) the monetary base in just two years. In any tidy, mathematical world where economics is governed by linear, rational processes, this doubling of the monetary base would result in inflation.

Unfortunately, the real world is not very tidy.

The monetary base is really an abstraction that refers to the amount of money that the banking system has available to pyramid into a greater number of loans. As I am sure you have figured out by now, simply having more money in the system will not automatically result in more money chasing goods.

In fact, without a good reason to borrow and then spend that money, those new funds may well just sit in the banking system chasing nothing related to real goods and services in the real economy. Instead, that money will simply chase financial assets such as stocks and bonds.

The BoJ knows this, and yet their plan revolves around the idea that they can create inflation by simply doubling the monetary base. Does this mean they are confident that there is pent-up consumer demand that was stymied by a lack of cheap funds from the banking system?

The very short answer is ‘no.’ The BoJ knows perfectly well that more base money will do nothing to stimulate additional inflation via consumer demand, and they know this because Japan has had rock-bottom borrowing costs for a very long time.

The Real Target – Trust...

The form of inflation that Japan hopes to stoke involves the kind where money currently stored in Japanese bank accounts comes roaring out into the Japanese economy. The BoJ is willing to harness the import/export losses* as a useful means of convincing the local businesses and populace that the yen is just not a safe store of value.

So the basic plan that the BoJ has put into motion is to ruin local faith in the yen...

Trust is an essential component in every economy and for every currency. The BoJ has just upped the ante by explicitly and specifically targeting trust in the yen. Perhaps they know what they are doing, and we certainly hope so, but I happen to think it is playing with fire. (Japan vs. Newton (and Certain to Lose)

[*When the BOJ prints money, it devalues the Yen versus other currencies. That makes exports cheaper for foreigners, who pay with dollars, euros etc.  Companies such as Toyota, Honda and Canon benefit greatly. Japanese consumers take a big hit to their cost of living as everything imported to Japan will cost much, much more. Oil, food and other things might double in price. It is a zero sum game. Exporters win while ordinary citizens get slammed by higher prices.]

The Japanese stock market has gone wildly higher since the November election not because people are especially bullish on Japanese companies - they are not bullish on real growth, earnings or the economy. No, people are buying Japanese equities because they are bearish on the value of Yen. 

Screen Shot 2013-04-07 at 1.45.37 PM

(Chart source: Yahoo)

Last week, Mish Shedlock referred to the Bank of Japan's plans as madness: "Central bankers have gone totally mad. The stunning news of toady is a new pledge by Japan to double its monetary base in two years as the Bank of Japan Unveils Aggressive Easing... As one might expect on such a surprise announcement, the Yen had a spectacular plunge."

yen 20 minute chart

(Chart source: Mish)

Mish continued: "This is all in accordance with the Fed Uncertainty Principle Corollary Three:

"Don't expect the Fed [central banks in general] to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.


"Japan is eventually going to achieve "escape velocity" on deflation, and I assure you Japanese citizens will not like the results when it happens.


"When the Japanese bond market finally reacts to this inane policy, there is going to be a global currency crisis. (Competitive Easing Madness; Japan to Double Monetary Base; Draghi Signals More Easing; Yen Plunges)"

In the U.S., as in Japan, the economy and the stock market have detached. It's because people know that the value of cash is being eroded as the Fed "prints" new money to flood into the financial system and devalue the dollar. With a Zero Interest Rate Policy (ZIRP), there simply aren't practical alternatives for holding cash, investing, or earning decent interest.

As we have just seen occur very acutely in Japan, in the U.S., people are buying stocks as a defense against the U.S. dollar's slow and painful demise.

Given this landscape - with a vehement currency war brewing - equities prices are going higher, even after their terrible performance in 2008/2009 meltdown which chased many people out of the stock market. 

Not only should an analysis of stocks consider the background in which stocks are priced, it should also consider investor psychology. Has the public fled for good? Probably not. 

In Mom and pop: The world’s worst investors (MarketWatch), Brett Arends wrote: 

"Stock prices were wrong in 2007 because they were too high, and they were wrong in late 2008 and early 2009 because they were too low.


"Second, as they [investors] now know, they sold out somewhere near the lows. They were not alone. According to the Investment Company Institute, the trade body of the mutual fund industry, U.S. investors flooded the market with stocks in the fall of 2008 and the winter of 2009. From September, 2008 through March, 2009, ordinary U.S. investors dumped $114 billion worth of stock funds. They sold at absolutely the worst time.


"This is not a coincidence. The stock market is 'us.'”

Currently, even after four strong years of stock market gains, the ordinary U.S. investor has not quit his job, invested all his money, and joined the party. As  observed: 

"To be clear, I don't see the renewed interest in stocks from the Mom & Pop investor class as a negative or a sign of a massive top - it's when they start quitting their jobs to daytrade or offering me tips at dinner parties that I get more circumspect about the meeting of Main Street and Wall Street.

"But, we're not there yet, these people are buying index funds at this point and they are anything but giddy and care-free at the moment.

"I nicked the below chart from Barry, it's hard to say the folks are truly "running with the bulls" just now. My best guess is we're somewhere hovering between Media Attention - "new highs!" - and Enthusiasm. Could be wrong, just a hunch."


From: Brett Arends on Why Your Mom & Pop Can’t Invest for Sh*t.

Where do we think the public is on this chart?

Typically the public enters the market only after a large run up, just in time to buy at the top. Investors might get luckier in today's situation if American stocks start behaving more like the Nikkei 225 index. US equities have plenty of room to run simply as hedges against massive money-printing by Chairman Bernanke. 

Read the full Market Shadows Newsletter: MarketShadows: No Direction Home, April 11 2013.

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moneybots's picture

"Just because the market gets constant steroid shots or is at variance with economic conditions is not a reason to stay out.  There are fewer and fewer paths for making a profit with disposable income"


That is probrably what the clients of MF Global thought.  Their profits vanished.


What happens when the U.S. government decides your account is too big and appropriates a chunk of your profits?  Obama is already proposing that one can only remove 200,000 a year from a tax free retirement fund.

What will be next?

moneybots's picture

When Greenspan is telling the public to buy stocks, how far away is the top?  Greenspan is trying to sucker the dumb money in, just as he did with his pronouncement that home buyers should get adjustable rate loans.

I have no interest in being suckered in to buy at the top, no matter how tempting it seems.

The above chart actually breaks down to 9 market participants, not just 3.  It is not Charles Dow's market any more.


The CW is that the market can't go down, because ZIRP is guaranteed to 2015 and QE is open ended.  So why did IBD have 6 distribution days in the last few weeks?

Goldman just put a price target of 1,900 on the S&P for 2015.  Was that for the benefit of the Muppets?  The Wallstreet 1,000 price target on Apple, worked to pull the last bag holderes in.


IamtheREALmario's picture

OK, so banks and international bankers have proven themselves to be completely untrustworthy ... should not give money to banks.

The stock market and those who run it have proven to be completely untrustworthy ... should not put money in the stock market.

The government and the politicians have proven themselves to be completely untrustworthy ... heck if I would ever give them any money.

The real estate market is scammed and manipulated by bankers ... should not buy real estate for investment

Cannot trust the mainstream media because they are proven liars and propagandists.

Based on this destruction of trust, it leads me to two possible conclusions:

1. The destruction of trust is intentional and designed as a way to tear our societies apart, where no one trusts anyone else ... albeit in this case the center of that destruction comes from the bankers and their use of money to destroy trust.

2. People are just smarter now and aware of the tactics of the bankers and their money influence... although I do not believe this is true because many times in the past people were able to fight the bankers, who were not trusted then either and defeat their plan to screw the people of the world.

tango's picture

If every institution - business, media, markets, politics, banking and investing - is a sham then why bother trying?  ZH is increasingly seen by outsiders as a home for nutty malcontents who diligently search for enemies.  Posters bash every insitution from sports to entertainment to local banks to education to technology to markets.   And anyone not in 100% ideological lockstep is either a dumb "sheeple" or part of the conspiracy. More likely, they don't give a shit since every facet of society is rotten, you know.   

Why should the sheeple bother to learn about what is going on when we tell them everything is a sham in the first place?   If the only thing we have to offer is violence, hanging all politicians and bankers and growing our own veggies, why should they care?

Boubou's picture

There may nothing you can offer. For something to change in an institution - Government, Corporations, the Church, the Press you would need

(1) Someone with this goal to seek and obtain power

(2) Such a person to overcome the entire establishment which benefits from the status quo

People are desperate to believe in something and somebody witness the initial euphoria with Obama.

I just don't see it happening.

Maybe you have to join them - figure out how a full appreciation of the ugliness and depravity of the establishment can be turned to advantage

Theosebes Goodfellow's picture

Not every bank is a sham, though the currency we use is. Is ZH the home of nutty malcontents? You bet we are! (But we also are the ones poking the most fun, if for no other reason than to find a way to deal with the outrageousness we see.)

As you know from reading and commenting here, there are two kinds of people posting on ZH. The first are snarky ranters who feel as you describe and are vociferous in sharing their point of view with anyone who will give them attention. They have a "smarter-than-thou" attitude that somehow implies they are privy to more knowledge than the rest of us. The second crowd, the ones I enjoy so much, actually "get" all this economic stuff and the nuances that events portend. Those are the ones I pay attention to when they opine. I cannot describe how much I have learned from them.

Nobody I know or have ever met owns or has owned a crystal ball. The only thing one can do is read the socioeconomic and political tealeaves, as it were, and take an educated guess as to how things will unfold due to what has transpired so far. You cannot make anyone else adjust their lifestyle due to what you think may happen but you can definitely modify your own in preparation for what appears to you to be the most likely outcome of current and past events, growing your own veggies, so to speak.

Life in America these days, (and in much of the world as well), is like you and a friend who have been out drinking to excess and are now on your way home in his car. He's way messed up and driving too fast along the old mountain road and your vision is too blurry to be of much aid to him. You know that this scenario cannot end well but you just don't know when though in your polluted condition you figure it beats the crap out of walking. That's us, in a nutshell.

So what's to be done? Like any condemned man, you think of "putting your things in order". You grow a garden, you convert some of your cash into PMs perhaps, you buy farm implements maybe, and even look for good deals on farmland if you can swing it. When, (not if), TSHTF, (because you cannot do what we have done to our currency and not pay a price), you, me and all the rest of us, (who make it through the "transition" period), will go on and live within the new paradigm. What's that going to look like? Meh, who knows? My thinking says much more local and community based. But in all reality your guess is as good as mine. Just remember that famines are short-lived things, relatively speaking, and that no "civilization" is more than three meals away from rioting in the streets.

akarc's picture

Tango, I got to agree. I read ZH for a long time before I ever signed up and longer still before I ever placed my first comment. I get a lot of value from many of the posts and have learned much from reading them.  However I can not help but wonder how many potential allies ZH runs off when the comments and some recent posts give rise to race bashing. 

The enemy of my enemy is my friend as I have been raging against the night for years. However the light that illuminates what all should be aware of that can be found here is all to often contradicted by pure unalterated crap and hate  for anyone who doesn't toe the party line.

Yes I know this is fight club and get over it. But I have learned you really can't fight ignorance.

From a marketing perspective it may be a great theme. Worked (s) well for Rush Limbaugh.

In the begining I found Rush a fresh voice. Then when every show became a hate Hillary diatribe I quit listening.

The enemy of America is the corruption at the top (and within the rest of us) and the failure to hold them accountable. That failure belongs to every last one of us. Failure to recognize this will  insure victory for the kleptocrats. 

RiverRoad's picture

And "those new funds" sitting in the banking system will be, as usual, accessed by the 1% and stuffed into tax havens:
the faster money is printed, the faster it will be stuffed.  Inflation?  What inflation?

rsnoble's picture

When they have the guns then they can Cyrpus the US.  Hopefully things blow sky high before then that is our only hope.

earnyermoney's picture

Article clearly states what the fascists running the country desire from the investing public. At the moment, the goal is to discredit anything other than bonds and equities in the hopes the public ie. sheeple move their "money" off the sidelines. Thus the coordinated "Gold was proven not to be a safe haven..." meme.

tango's picture

It's much worse than that.  We are rapidly losing our aspirational spirit that once embued the land.  Instead, we politicize every facet of existence and settle for lives of lowered expectation. What's insane is that our centrally planned economy is based on spending, debt and an ever more authoritarian state yet anyone with an atom of sense knows that it's investment, savings, prudence, planning, hard work and the freedom to choose and fail that create real prosperity.  Real investors look around - PM, property, energy, food, art, new enterprises. 

blindman's picture

must steal the pension money.

Palladin's picture

Bob Dylan - Like A Rolling Stone  - June 1965

You used to ride on the chrome horse with your diplomat
Who carried on his shoulder a Siamese cat
Ain't it hard when you discover that
He really wasn't where it's at
After he took from you everything he could steal


dontgoforit's picture

D.H. Lawrence - Lady Chatterley's Lover

Make money! Make it!  Out of nowhere!  Wring it out of the thin air!  The last feat to be humanly proud of!  pg 58 PB edition

Downtoolong's picture

Typically the public enters the market after a large run up, in time to buy at the top.

I think this may be the best definition of a market top. The market can’t dump until the suckers and Muppets buy into it, because, the long pumpers still need someone to sell and dump to for a profit. The same process works in reverse at a market bottom after the dumpers get short and squeeze the Muppets to sell their position at a loss. The process is aided and abetted by monetary and credit policy of the Fed and central banks. The pumpers are given access to cheap or free money to assist and keep the pump going as long as it takes until the Muppets can’t resist the lure of easy profits and buy in. The bigger the bubble, the bigger the collapse when it occurs. Market cycle my ass. In the end it’s just one giant con.   

IamtheREALmario's picture

I am wondering which mom and pops they think have enouh money and security to put it in the crooked scam called the stock market. So, maybe the scam this time is to keep all of the mom and pops out of the market. But that is not a scam, just good advice, but they might not know or believe it.

Yes, trust is critical to being able to perform a "con" on someone. The banks and market are many, many years away from restoring trust because trust just keeps eroding day after day.

dontgoforit's picture

Trust.  Who do you trust?  Bank?  Used to.  Government - well, maybe used to.  Spouse?  Yeah - mostly.  Mom - only when she's not drunk.  Jesus - Every time, all the time.

earnyermoney's picture

Exactly. The past 3 plus years at Zero Hedge have made that abundantly clear to me as an outsider to the 'bankster" cartel.

A82EBA's picture

great explanation, thanks. I hope it heads south soon

pbr streetgang's picture

Beware Monex ;they are the conduit to hell !

blindman's picture

Blind Faith - Can't Find My Way Home - 1969

BandGap's picture

Am I way off base thinking that conditions are being manipulated such that individuals are being lured to buy at the top? This would, of course, mean they would pay for the crash. That's just fucking wrong.

I have not bought a stock in years and hell if I will start now looking at this illusion of a market. Fuck all of them.

tango's picture

Once again, there is no grand plan or behind the scenes conspiracy to get people to do anything.  Buying near the top is a very human action.  First, you must get the attention of those who know nothing of markets.  Then you must perform well long enough to make then "invest" in whatever Aunt Harry or Cousin Joe heard was a good buy.  Of course,  by this time we are near tops.   (Same with a bottom cycle.) The whole key to investing is handling the down times but since so few folks are aware of hedging mechanisms (puts, gold, Treasuries, bonds, etc) they go with the flow and bitch all the way down until they finally sell.. 


Just because the market gets constant steroid shots or is at variance with economic conditions is not a reason to stay out.  There are fewer and fewer paths for making a profit with disposable income.  I have been in since the 8,000 level and expect to stay there until the FED stops (never?) or the public joins the final phase in a mad, volcanic rush OR our debt hits 25 trillion.  I used to say 10, 12, 15, 18 trillion but since no one seems concerned I think 25 trilion is a good exit point.   

blindman's picture

not off base ! criminal manipulation and stealing is wall street.
they deal in debt and debt slavery even when the debts are
fraudulently created and induced. it always collapses on those
in the basement. speculation on junk and debt may work at some
point in a cycle but this ain't it. imo.
it looks more like the opposite to me.