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The Mystery Of The "Spring Swoon" Revealed

Tyler Durden's picture


For the last few years, the US equity market has soared through Q4 and into Q1 and macro-economic indications have trended with them in a virtuous circle 'confirming' that this time it's different and recovery is 'on'. Then just as investors get all bulled up, convinced by the market's all-knowing-efficiency that the old normal is back and growth is returning, macro-economic data starts to disappoint expectations. This is initially shrugged off - "it's a transitory dip", "the market sees through this temporary weakness", "where else are you going to put your money?" - and the stock buying continues through the Winter. But there comes a time, when the divergence from economic reality grows too wide and the 'faith' that the market knows best starts to fade; and sure enough, each time, the market drops back rapidly to reality. What is the common denominator for this winter surge?

Simple - massive global central bank bailouts/injections in the months just before winter that levitate the market (and psychologically create 'hope' that is then extrapolated into future economic expectations which then after a one- to two-quarter lag, leads to disappointment as real economic data can't match the market's implied reality).








So while heretofore taboo topics such as seasonal adjustments have been put forward to explain this mysterious cyclical deterioration between the winter and spring season for three years in a row; it seems the answer is far simpler and more practical to our new normal reality - a Central Bank induced hope that floods from market to real economic hopes, is 'priced in' by analysts, then fails to live up to the reality simply because it was never a real trend anyway - that leaves the economists all looking at their Birinyi's rulers and wondering if once again, the extrapolators-in-chief are wrong...


Print, Rinse, Repeat...


Charts: Bloomberg


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Tue, 04/23/2013 - 20:56 | 3491069 polo007
polo007's picture

According to Global Gold AG:

Financial Repression

The term financial repression is becoming more and more present in the media. What’s actually behind the term? Financial repression is defined as measures which governments take to channel funds somewhere where they wouldn’t go if left to the free market. So why would governments do such a thing? The answer is debt! Most western countries have piled up a gigantic debt burden. To illustrate this, the chart below shows the debt burden in percent of GDP for selected countries. It is clear, that even countries which are currently not in the spotlight have debt levels which already today seem simply unsustainable. If one takes the so called unfunded liabilities into consideration which are promises already made, like pensions etc. that aren’t funded yet the situation seems dramatic (red bar). Due to these extremely high debt levels governments all over the world have an incentive to channel funds into a certain direction, e.g. government bonds. Financial repression has already started in one form or another but is likely to increase in the future.

Tue, 04/23/2013 - 20:58 | 3491084 zorba THE GREEK
zorba THE GREEK's picture

Spring is here and the markets turn queer,

Tue, 04/23/2013 - 21:07 | 3491113 flacon
flacon's picture

One of these days the market crash that we are all hoping for will start.... it just feels like forever, with a lot of false starts over the past 4 months! It's getting irritating. 

Tue, 04/23/2013 - 21:12 | 3491124 fonzannoon
fonzannoon's picture

flacon at this point I disagree. The next crash won't be a crash. It will be over with within 3 seconds if it happens during market hours. Probably more realistic that the market just closes one day and does not open the next.

Tue, 04/23/2013 - 21:40 | 3491191 Unique Snowflake
Unique Snowflake's picture

Bingo! Any of the elites look like losing money and the markets will close in an instant. In fact I'll put money on the next 'terrorist' attack happening after a market fall, causing a market panic, thereby enable a convenient excuse to close the markets.

Tue, 04/23/2013 - 22:20 | 3491309 Groundhog Day
Groundhog Day's picture

Perhaps a cyber attack will be blamed for the total annihilation of sheeps wealth.  It can never be traced back to the crooked bankers.  I'd place odds on that

Tue, 04/23/2013 - 23:20 | 3491474 fourchan
fourchan's picture

earnings dont mean a thing when bens around.

Wed, 04/24/2013 - 07:49 | 3492120 What is The Hedge
What is The Hedge's picture

It don't me a thing if it don't move in Spring.

Doo wop, doo wop, doo wop......

Tue, 04/23/2013 - 23:15 | 3491459 espirit
espirit's picture

+1 To PoloTrollo.  Cut and paste somewhere else, otherwise I'm going to uptick your every post and cut off the commissions.

Starve the Trolls.

Tue, 04/23/2013 - 20:57 | 3491074 polo007
Tue, 04/23/2013 - 21:18 | 3491140 Ness.
Ness.'s picture

Give it fucking rest already.  If I want to read your c/p shit, I'll find your site on my own.

Tue, 04/23/2013 - 23:11 | 3491450 espirit
espirit's picture

+1 To the Troll.  Starve the beast.

Tue, 04/23/2013 - 20:56 | 3491075 fonzannoon
fonzannoon's picture

I don't mean to be the dick but according to the charts even "reality" is a rising (albeit trailing) S&P 500. If reality is, according to the last chart....S&P 500 above 1400 then what are we on here all day bitching about?

Tue, 04/23/2013 - 21:01 | 3491096 Awakened Sheeple
Awakened Sheeple's picture

We didn't BTFD?

Tue, 04/23/2013 - 21:12 | 3491128 Cdad
Cdad's picture

Seriously?  What are we bitching about?  

Endless Wall Street bailouts, via

A Fed that is destroying our currency

A Fed that leaks intentions to friends

HFT sub pennying us to death

A Fed that perpetuates DC spending through debt creation

Statistics that are manipulated...until they suddenly aren't...and the dislocations

World wide currency wars

Markets that go up due to selling, and fall from buying

Markets that have no association with fundamentals, and zero price discovery

Wall Street products designed to fail, over and over and over

Wall Street crimes that go unpunished

Flash crashes about how the market continues to pay off...the last and dumbest long side trader...almost every day?

How about how all of this has destroyed the market, how it is no longer a free market, and what that means for the Republic.


Nice myopia, dude.  

Tue, 04/23/2013 - 21:17 | 3491141 fonzannoon
fonzannoon's picture

Right, and according to that third chart, after all of what you just described, the difference between the economy and "reality" still has the S&P is fairly valued above 1400.

You just described REALITY. That last chart claiming the S&P above 1400 reflects reality is what I take issue with.

Chill out dude, I'm not your enemy.

Tue, 04/23/2013 - 21:24 | 3491154 Divided States ...
Divided States of America's picture

I know what you mean Fonz but I would take S&P1400 right now in a heartbeat.

I am sure by the time the S&P is at 1400, the macro chart will have deteriorated and it would be pointing to 1200 or the markets is lagged and is just playing a continuous catchup to reality, not the other way around which stocks are 'supposedly' forward looking.

Tue, 04/23/2013 - 21:30 | 3491159 AssFire
AssFire's picture

You men eat your dinner, eat your pork and beans
I eat more chicken, than any man ever seen, yeah, yeah
I'm a back door man, wha, the men don't know

But the little girl understand
Well, I'm a back door man
I'm a back door man
Whoa, baby, I'm a back door man
The men don't know
But the little girls understand

Now, back to my regularly scheduled bath salts with beer chasers...

Tue, 04/23/2013 - 21:33 | 3491171 fonzannoon
fonzannoon's picture

Divided CDAD needed a rant and I am happy to give it to him but he missed my point completely. Reality for the S&P is a complete reset. Am unimaginable wipeout. Not a 10% correction.

The S&P is what it is. But those charts that claim to represent reality represent anything but reality. I guess, being in the business I should shut up and take 1400 as you say. However I agree with CDAD completely.

Tue, 04/23/2013 - 21:42 | 3491198 Divided States ...
Divided States of America's picture

I agree. In my mind, I aint looking for just a 10% correction. Like you said, I think when this thing starts cascading, it cant be stopped and when it starts, it wont just be the algos pressing the SELL button, it will be real humans doing it also. This will lead to a wipeout. Its like one day everything was all good and then the next day, all hell breaks loose.

Tue, 04/23/2013 - 23:31 | 3491511 Imminent Crucible
Imminent Crucible's picture

Circuit breakers. I look for some trigger event that leads to a market that goes lock limit down at 9:30 ET and just doesn't re-open, with all the sheep penned inside and no way to get out. No way except the Theresa Ghilarducci Guaranteed Retirement Account: Give us custody of your wrecked retirement fund and we'll restore it to the pre-crash level, with a 3% annual return you can count on, NO MATTER WHAT HAPPENS. Even if there's a hyperinflation, you'll still get your 3% return.

And we'll get your life savings.

Tue, 04/23/2013 - 23:55 | 3491569 nomorebuyins
nomorebuyins's picture

True IC, very scary but realistic possible outcome.

Tue, 04/23/2013 - 22:10 | 3491286 gjp
gjp's picture

Totally onside Fonz. With all these spring swoons, year to year the s&p is consistently higher, while society sinks. This is no cyclical game, this is existential.

Tue, 04/23/2013 - 23:35 | 3491180 Randall Cabot
Randall Cabot's picture

seasonal reality?

Tue, 04/23/2013 - 20:56 | 3491076 polo007
polo007's picture

According to Stifel Nicolaus:

Financial Repression Beneficiaries

Energy, Materials, Information Technology and Industrials benefit from periods of financial repression vis-à-vis Consumer Discretionary, Consumer Staples and Health Care which benefit from an end to financial repression. This supports a pair trade opportunity, in our view. We see a mid-year U.S. jobs lull and uncomfortably low inflation, as well as sluggish mid-2013 GDP causing deficient Federal revenue which impedes fiscal deficit % GDP progress this year. In total, we think this leads the Fed to continue the full $85 billion/month QE3/3.5 to year-end and possibly 2014. Low P/E & high margin financial repression beneficiaries may outperform high P/E multiple & high profit margin groups that do well when financial repression ends.

We have held the view that the S&P 500 is in the “Late Bull” stage of a “Cyclical” Bull within a “Secular” Bear market.

Tue, 04/23/2013 - 20:58 | 3491088 fonzannoon
fonzannoon's picture

Hey dude fuck off with the stiefel bullshit already.

Tue, 04/23/2013 - 21:43 | 3491206 polo007
polo007's picture

Are you in denial regarding the United States precarious debt situation?

$16 trillion and counting.

Also, it is quite obvious that Bernanke is manipulating interest rates below 0% via QE forever solely for the benefit of the US government, the primary dealers, and the wealthy 1% of US society.  This is called socialism.

1) Socialism benefits the few at the expense of the many: Socialism is superior to capitalism in one primary way: It offers more security. It's almost like an extremely expensive insurance policy that dramatically cuts into your quality of life, but insures that if worse comes to worse, you won't drop below a very minimal lifestyle. For the vast majority of people, this would be a terrible deal. On the other hand, if you're lazy, completely incompetent or alternately, just have a streak of very bad luck, the meager benefits provided by socialism may be very appealing. So a socialist society forces the many to suffer in order to make it easier for the few. It's just as Winston Churchill once noted, "The inherent virtue of socialism is the equal sharing of miseries."
2) Capitalism encourages entrepreneurship while socialism discourages it: A government in a capitalist economy can quite easily give everyone equality of opportunity with a few basic laws and regulations, but socialism strives to create equality of results. This should frighten people who value their freedom because ultimately, as F.A. Hayek has noted, "A claim for equality of material position can be met only by a government with totalitarian powers." You can see this happening in America as our efforts to reduce "inequality" have led to an ever expanding government and a vast regulatory tangle that is almost unexplainable despite the fact that it is certainly enforceable. Capitalism encourages people to start a business and build a better life for themselves while socialism lays in wait with IRS agents, nooses made of red tape and meddling bureaucrats looking for businesses to control and loot.
3) Capitalism leads to innovation: Coming up with new products is often time consuming, expensive and hit or miss. Nine ideas may fail before that tenth one takes off. The less the creative people behind these ideas are allowed to benefit, the less time, money and effort they'll put into developing new concepts and inventions. Put another way, the bigger the risk, the bigger the reward has to be to convince people to take it. Capitalism offers big rewards for productive people while socialism offers makers only a parade of bureaucratic leeches who want to take advantage of their "good fortune."
4) Capitalism produces more economic growth: Capitalism produces considerably more economic growth than socialism and as John Kennedy said, "A rising tide lifts all boats." A fast growing economy produces more jobs, more wealth and helps everyone. Many people assume that capitalism isn't working if there are still poor people, but that misses the point. In many parts of the world, poverty means living in a hut with a dirt floor while in America, most poor Americans have TVs, refrigerators and cell phones. The rich may take home a larger share of the pie in capitalism, but the poor also benefit tremendously from living in a growing, thriving economy.
5) Socialism is too slow to adapt: Capitalism is extremely good at allocating capital to where it's most valued. It has to be. Either you give people what they are willing to pay for or someone else will. On the other hand, socialism is slow and stupid for a variety of reasons. Because the government is spending someone else's money, it doesn’t get particularly concerned about losing money. Political concerns about appearances often trump the effectiveness of a program. Moreover, even if politicians and bureaucrats are intelligent and competent, which are big "ifs," they're simply not going to have the specific knowledge needed to make decisions that may impact thousands of different industries. This is why capitalism may have its share of troubles, but when there are really colossal economic screw-ups, you'll always find the government neck deep in the whole mess.
6) Socialism is inherently wasteful: Milton Friedman once said, "Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own." This is very true and it means that the more capital that is taken out of the economy and distributed, the more of it that will be wasted. The market does a considerably better job of allocating resources than the government because there are harsh penalties for failure. A company that makes products no one wants will go out of business. A poorly performing government program that wastes a hundred times more money will probably receive a bigger budget the next year.
7) Capitalism works in concert with human nature while socialism works against it: Ayn Rand said it well, "America’s abundance was created not by public sacrifices to ‘the common good,’ but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America’s industrialization. They gave the people better jobs, higher wages and cheaper goods with every new machine they invented, with every scientific discovery or technological advance—and thus the whole country was moving forward and profiting, not suffering, every step of the way," but Adam Smith said it better, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” A man will work much harder to take care of himself, his family and his friends than he will to make money for the state, which will then waste most of it before redistributing it to people who aren't working as hard as the man who earned it in the first place.

Tue, 04/23/2013 - 21:50 | 3491226 fonzannoon
fonzannoon's picture


Tue, 04/23/2013 - 21:53 | 3491233 MortimerDuke
MortimerDuke's picture

Yes, but perhaps you could elaborate on the differences between capitalism and socialism?

Tue, 04/23/2013 - 23:10 | 3491445 espirit
espirit's picture

+1 To the Troll.  Starve the beast.

Tue, 04/23/2013 - 23:40 | 3491528 Imminent Crucible
Imminent Crucible's picture

"Socialism offers security"

Offers being the operative word. Duh. There's NO SUCH THING as security. It's an illusion. Do not waste another moment of your life seeking security. No one here gets out alive, and it's what blindsides you that takes you down.

You can stack metals, store food, build a retreat, and still lose it all in a second. I've done all those things, but there are no guarantees and the wolf is always at the door. Always.

Best to get on with life, but don't fool with null concepts like security. Those who give up essential liberty to purchase a little temporary security....are screwed.

Tue, 04/23/2013 - 23:08 | 3491440 espirit
espirit's picture

+1 To the Troll.  Starve the beast.

Tue, 04/23/2013 - 20:56 | 3491077 kevinearick
kevinearick's picture

increasing the torque, with resonance...

Tue, 04/23/2013 - 20:57 | 3491080 enloe creek
enloe creek's picture

csi is on... next commercial I will read this


Tue, 04/23/2013 - 20:58 | 3491082 polo007
polo007's picture

Still, what is the ultimate payoff for the price of potentially distorted markets? Will the Fed's stated goal of improving labor market conditions be met as a result of its policies?

Unfortunately, I do not believe current policy will aid in resolving job market struggles more than at the margin. The U.S. labor market recovery suffers not merely from uncertainty, or from lack of sufficient aggregate demand, as contended by many, but rather it faces an array of structural headwinds that are likely to be overcome only in time. For example, most of the payroll gains witnessed since the beginning of the labor market recovery have come in sectors not directly affected by the financial crisis, whereas the sectors of the economy most directly disrupted have struggled to adjust to the new environment. And while the economy grows and labor markets slowly improve, the labor force should also expand at a clip that might keep the unemployment rate unusually high and the Fed accommodative for too long.

Tue, 04/23/2013 - 23:18 | 3491470 espirit
espirit's picture

+1 to the Troll.  Starve the beast.

Tue, 04/23/2013 - 21:00 | 3491083 spankthebernank
spankthebernank's picture

If we roll over this spring are the algo's gonna have enough ammo to push through a long term quadruple top next fall/winter?  I guess time will tell.


Edit:  polo-go thread jack somewhere else up putz, zh's don't care about the garbage you've been posting of late.

Tue, 04/23/2013 - 21:01 | 3491094 polo007
polo007's picture

Total Dollar Amount of All U.S. Treasury and Mortgage-Backed Securities Held by the Federal Reserve:

Tue, 04/23/2013 - 21:01 | 3491102 spankthebernank
spankthebernank's picture

Its called a keynsian balance sheet explosion you clown, post something new.

Tue, 04/23/2013 - 23:06 | 3491437 espirit
espirit's picture

+1 to the Troll.  Starve the beast.

Tue, 04/23/2013 - 21:00 | 3491098 kill switch
Tue, 04/23/2013 - 21:04 | 3491103 HeavyShadow
HeavyShadow's picture

as Arnold once said:

'moar guns, moar ammo'

a real war should sort the economy out...not this phony, hocus pocus, sith mind trickery... Get to work leaders of the free world...people are waking up to the fact that building #7 was a demolition job...more arms sales required...

Tue, 04/23/2013 - 21:16 | 3491138 doggis
doggis's picture






Tue, 04/23/2013 - 21:41 | 3491194 Croesus
Croesus's picture

@ Doggis:

Agreed. The subtle signs say a lot more than the words do. Out of all of the people I read, I can't find one who is not apprehensive about what's going on, vis a vis the economy, the markets, the currencies, the legal climate, banks, banksters, etc.

Not one.

I have to wonder what Bernank's 'schedule conflict' is....bullshit? Something bigger going on? Inside knowledge that 'it's not going to matter, anyway'? Busy setting up another Heidelberg? Helicopter lessons?

It's not without a reason. It usually isn't.


Tue, 04/23/2013 - 21:42 | 3491201 fonzannoon
fonzannoon's picture

I have not seen cnbc mention it once. Astonishing.

Tue, 04/23/2013 - 22:56 | 3491405 espirit
espirit's picture

Maybe a false flag terrist attack?  Kinda close to Idaho...

Just saying.

Tue, 04/23/2013 - 23:11 | 3491447 Croesus
Croesus's picture

@ Fonz:

I know, I haven't either. Then again, all the MSM seems to talk about re: financial matters:

- Buy stocks.

- Buy housing.

- Big recovery.

- Invest Moar.

- Gold sucks.


Tue, 04/23/2013 - 23:11 | 3491451 fonzannoon
fonzannoon's picture

If Bernanke farted Liesman would eloquently describe the smell. It's weird.

Tue, 04/23/2013 - 21:29 | 3491160 philosophers bone
philosophers bone's picture

This has been going on for more than a few years!!  Early months of the year are "selling season" where sheep make contributions to their tax deferred accounts.  Then once the sheep are fully invested (which takes until March, April), the institutions "sell in May, and go away"! 

Wed, 04/24/2013 - 04:28 | 3491910 Urban Redneck
Urban Redneck's picture

I don't Ben think cares about sheep, unless he's horny.


It would be to see the seasonality of the TBTF and Sovereign refunding calenders and how they overlay with the Fed's jawboning...


Tue, 04/23/2013 - 21:33 | 3491168 DormRoom
DormRoom's picture

The US has gone through the bubble after bubble since 1996.  That's almost 20 years!  The trendline has been distorted by bubbles, and credit fueled growth.  The new normal?  It hasn't been normal in a generation.

Everytime the market tries to clear capital misallocation, and mispricing, Central banks pump, and distort. 

Bernanke, and Kuroda are men of straws grasping at straws. 

Tue, 04/23/2013 - 21:34 | 3491170 Dr. Engali
Dr. Engali's picture

Rand needs to decide if he is going to be on the side if freedom or tyranny. Now he flops and is okay with drones.

Tue, 04/23/2013 - 21:42 | 3491196 fonzannoon
fonzannoon's picture

"I don't care if a drone kills him or a policeman kills him"

Man that made me ill.

At least drones don't have pensions I gues...

Tue, 04/23/2013 - 23:21 | 3491484 espirit
espirit's picture

Sorta feel the same way about Bernanke.

Tue, 04/23/2013 - 21:43 | 3491200 Awakened Sheeple
Awakened Sheeple's picture

"I've never argued against any technology being used when you have an imminent threat, an active crime going on," Paul said. "If someone comes out of a liquor store with a weapon and fifty dollars in cash. I don't care if a drone kills him or a policeman kills him."

- Rand Paul

Fucking traitor.

Tue, 04/23/2013 - 21:54 | 3491236 HeavyShadow
HeavyShadow's picture

An article aimed squarely at hurting the base Paul had laid in his filibuster...wouldnt be the first time that site was used to that end flip-flop here...nothing is stated otherwise from his position of 'due process' much referred to in his filibuster...he was describing more a firefight type of situation.

Looks like this poor man's form of propaganda is working too. Sad.

No allegiance here, looking into the US from the outside.

Wed, 04/24/2013 - 00:04 | 3491576 Dr. Engali
Dr. Engali's picture

Maybe you should watch his base's response

Tue, 04/23/2013 - 21:43 | 3491207 scatterbrains
scatterbrains's picture

The one lesson from all of this is that the markets can never be trusted again. Seriously are we to believe once Ben fixes everything they will never molest or manipulate the market again? It's too late, just buy gold and bury it, go on about your profession and let the politicians and crooks squabble about how much to print, how much to spend, how much to raise taxes on and on.  Gold negates all of it and keeps you in safe harbor. It's really just that simple.  When you look at the long term chart of gold and how it has risen over all the years of boom, bust, war, scandal, assassinations, political grid lock, rising taxes, inflation on and on, gold just ignores all of it and increases in value despite the banksters claiming it's a relic or tradition or regardless of what legislation or limitations they try to impose on it. Gold is pure, honest and continues to win against man's best efforts to constrain it. Gold allows you to get on with your life and ignore the follies of man.

Tue, 04/23/2013 - 23:01 | 3491417 espirit
espirit's picture

+1 So well put, even a troll-man could understand.

Tue, 04/23/2013 - 21:55 | 3491238 venturen
venturen's picture

Next year is Santa Claus!

Tue, 04/23/2013 - 21:55 | 3491240 eddiebe
eddiebe's picture

Be right and sit tight.

Tue, 04/23/2013 - 22:00 | 3491259 Smuckers
Smuckers's picture

It's fuck all hope and snowflakes.

Tue, 04/23/2013 - 22:02 | 3491263 BullyBearish
BullyBearish's picture

Pump it up, pump it up, pump it up...allow a little dip to accumulate enough short energy to pump it up some moar so that when everybody's in and nobody's short: throw down for the maximum's not enough to kill the longs, they must also do everything they can to prevent the shorts from profiting.


        B   E   R   N   A   N   K   E   =   M   U   G   A   B   E


        A   M   E   R   I   C   A   =    Z   I   M   B   A   B   W   E  

Tue, 04/23/2013 - 22:01 | 3491264 polo007
polo007's picture

One of the central arguments in economics, especially in the socialism vs. capitalism debate, is the role of the government. A capitalist system is based on private ownership of the means of production and the creation of goods or services for profit. A socialist system is characterised by social ownership of the means of production, e.g. cooperative enterprises, common ownership, direct public ownership or autonomous state enterprises.

Proponents of capitalism espouse competitive and free markets, voluntary exchange (over forced exchange of labor or goods). Socialists advocate greater government involvement but the differ in the type of social ownership they advocate, the degree to which they rely on markets versus planning, how management is to be organised within economic enterprises, and the role of the state in constructing socialism.

Tue, 04/23/2013 - 23:05 | 3491431 espirit
espirit's picture

+1 I'll uparrow you for troll like behavior in the hopes that it lessens your commissions, and subsequently starve to death.

Tue, 04/23/2013 - 22:19 | 3491302 Village Smithy
Village Smithy's picture
























Tue, 04/23/2013 - 23:28 | 3491502 Schmuck Raker
Schmuck Raker's picture

Well....better than another polo007 comment, I suppose. +1

Tue, 04/23/2013 - 23:40 | 3491532 polo007
polo007's picture


Aa warning about a coming financial crisis

Tumbling commodity prices over the past week are a warning sign to investors that China’s “economic miracle” is actually a gross manipulation of markets that will eventually have a nasty ripple effect across the world, says an outspoken critic of central banks’ stimulus efforts.

“Something has changed, and more significantly, people have noticed the change,” says James Grant, publisher of Grant’s Interest Rate Observer, a highly regarded bimonthly commentary on the world’s financial markets.

Mr. Grant says the world’s major central banks have been distorting the true price of assets, such as stocks and commodities, by suppressing interest rates and printing trillions of dollars worth of currency in an effort to stimulate demand. He believes that such policies by the People’s Bank of China will prove particularly harmful given that they are layered on top of the central planning policies of the Communist Party.

Efforts by the U.S. Federal Reserve and other central banks to jump-start demand have failed, Mr. Grant argues. Each new dollar or yuan added to the economy is having less and less of a stimulus effect and is instead further inflating asset and consumer credit bubbles. As China’s economy continues to slow, commodity prices will decline further, and it’s possible that China will even slip into a recession, he says.

In today’s world of suppressed interest rates and manipulated markets, financial crises come faster and more furiously, Mr. Grant says, noting that it took 25 years for stocks to rebound from the Depression in the 1930s but only four years for markets to recover from the financial crisis in 2009. The accelerated cycles are the result of distorting policies and they leave governments and markets “more accident prone,” he says.

Investors should respond by keeping large amounts of cash, looking for buying opportunities in depressed sectors. At the moment, shares of mining companies look like one of the best contrarian plays, he says.

Mr. Grant is also a huge fan of bullion, which he categorizes as a monetary asset rather than a commodity. “The price of gold is the reciprocal of the world’s faith in management of the world’s central banks,” he says. “If you believe that they are in charge of events, as opposed to events in charge of them, then you do not want to waste your time with gold.”

Wed, 04/24/2013 - 02:18 | 3491783 polo007
polo007's picture

The Federal Reserve has been explicit about why it has been holding short-term interest rates near zero and has purchased $2.5 trillion in Treasury and government-backed mortgage bonds to push long-term rates to once-unimaginable lows:

Not only does it hope cheap money will make borrowing and spending more attractive to businesses and consumers. It also wants to chase investors out of super-safe U.S. Treasurys and mortgages and into stocks, corporate bonds and other assets riskier than Treasurys. Boosting those prices, the central bank figures, will make households richer, increase the value of collateral that banks hold against loans and encourage executives—always happier when stock prices are rising—to invest.

Chairman Ben Bernanke and his allies at the Fed think all this is working as they had hoped, though they caution regularly that it isn't enough to resuscitate the U.S. economy nor is it without risks. Critics argue that it isn't doing much good—and that the risks are greater than Mr. Bernanke realizes. Now new Fed governor Jeremy Stein, a Bernanke backer, is arguing this bond-buying might have hidden benefits.

One oft-cited risk the Fed is running is that keeping rates very low for a long time could lead investors, big and small, to take ever-greater risks as they seek investments that promise better returns. That, in turn, could create a new set of financial bubbles. "These concerns should be taken very seriously, and a lot of work at the Fed is devoted to monitoring such risks," Mr. Stein said in a speech last month. "[T]here is some qualitative evidence of reaching-for-yield behavior in certain segments of the market, but we are not seeing anything quantitatively alarming at this point. Of course, the worry is that one often sees only the tip of the iceberg in these kinds of situations."

It isn't hard to spot bubble candidates. The price of farmland has been soaring. The U.S. Department of Agriculture's measure has risen 28% in two years. And Merrill Lynch's index of high-yield debt—borrowing by companies politely labeled "below investment grade"—is up 12% in the past year.

But Mr. Stein pointed to one way in which the Fed's bond-buying, quantitative-easing extravaganza might be contributing to financial stability. It is encouraging companies to rely less on short-term borrowing. That is welcome. "A major source of problems during the recent crisis," he said, was that firms, particularly in finance, "were relying too much on short-term debt." That left them exposed when markets panicked in 2008 and rolling over short-term debt became difficult, often impossible.

Before Mr. Stein left Harvard for the Fed, he and colleagues Robin Greenwood and Samuel Hanson showed statistically that when the federal government does a lot of its borrowing at shorter maturities, companies tend to do a lot of their borrowing at longer maturities, and vice versa. By reducing the supply of long-term Treasurys in the market, the Fed's heavy purchases are akin to the government borrowing more short-term.

There is a wrinkle. While the Fed is subtracting from the market's stock of long-term Treasurys, the Treasury itself seems to be fighting the Fed. It is adding to the supply of long-term Treasurys by selling more of them. The average maturity of the Treasury's debt outstanding has been growing for years. At the end of September, it was 64.4 months, well above the 30-year average of 58.1 months.

The Treasury's official explanation: We're trying to finance the government at the lowest cost to taxpayers. We aren't using a borrowing mix to influence the macro economy, and we aren't coordinating with the Fed on this. As the chart accompanying this column illustrates, the Fed's recent purchases of long-term Treasurys have more than offset the Treasury's moves in the opposite direction.

Wed, 04/24/2013 - 02:46 | 3491808 polo007
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European stock-index futures rose with Asian equities as slower-than-estimated Australian inflation boosted speculation central banks will step up economic stimulus. New Zealand’s dollar climbed while copper rebounded after sliding into a bear market and gold advanced.

The Euro Stoxx 50 Index futures gained 0.3 percent as of 7:01 a.m. in London, signaling the region’s shares may extend their biggest increase since August. Contracts on Standard & Poor’s 500 Index rose 0.1 percent. The MSCI Asia Pacific Index climbed 1.2 percent, the most in two weeks as Australia’s S&P/ASX 200 gauge advanced a fourth day. The kiwi strengthened by 0.5 percent to 84.36 U.S. cents. Copper rallied 1.4 percent in London and gold jumped 1.2 percent.

Australia’s central bank has more room to cut interest rates, Treasurer Wayne Swan said today, after the government reported inflation eased to 0.3 percent from the previous quarter. The Bank of England said it will extend its plan to provide cheap loans to companies and consumers and make credit available for small businesses. Reports today may show Germany’s business climate worsened while U.S. durable goods orders slid.

“There are still heightened expectations of central-bank action,” said Stan Shamu, a markets strategist at IG Markets Ltd. in Melbourne, a provider of trading services in currencies and equities. “The economy in the U.S. is hitting that sweet spot where it’s not bad enough to worry investors but not strong enough for the Federal Reserve to start withdrawing stimulus.”

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