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First Euphoria Then Reality
Submitted by Mark J. Grant, author of Out of the Box,
I think we are progressing into the next economic cycle.
“In my youth, I, too, entertained some illusions; but I soon recovered from them. The great orators who rule the assemblies by the brilliancy of their eloquence are in general men of the most mediocre political talents: they should not be opposed in their own way; for they have always more noisy words at command than you. Their eloquence should be opposed by a serious and logical argument; their strength lies in vagueness; they should be brought back to the reality of facts; practical arguments destroy them. In the council, there were men possessed of much more eloquence than I was: I always defeated them by this simple argument that two and two make four.”
-Napoleon
With all of the money thrown into the system by all of the major central banks in the world we had a number of consequences. First and foremost we learned that the money had to be used somewhere and so it was as the equity markets danced into the next stratosphere and bonds compressed like a Cuban sandwich. Benchmark interest rates have also fallen as the hunt for yield became ferocious and as sovereign debt rates fell to ever lower levels all driven by the newly minted cash.
The banks also did well as consistently lower interest rates allowed for quite profitable spreads. Corporations also benefited from the lower yields and have been able to borrow at very attractive levels due to the largesse of the Fed and its brethren. Where the policy has failed though or at least not dampened the problem has been in the underlying economies and the consumers.
Most of Europe is in a serious recession which affects the United States regardless of anyone having the mistaken belief that America is a country that stands alone. Next we have not had any inflation while Europe has experienced deflation as the little pieces of blue and green paper are not having the desired effect on consumers. Finally while reported unemployment in the U.S. has declined slightly the money pumped into the system has not accomplished one of the stated goals of the Fed which is to significantly reduce unemployment. It just has not happened.
“There are some people who live in a dream world, and there are some who face reality; and then there are those who turn one into the other.”
-Douglas Everett
Part of the reason for all of this, in America and in Europe, is that consumers have been penalized by the central banks given the very low interest rates. Over a period of time savers/investors/consumers have seen the return on their money in banks, bonds and various insurance products shrink and then shrink some more as their investments return less and less. This then means that the consumers, the bedrock of all economies, have less and less money to spend as they receive so little on their invested assets. This is also a consequence of Quantitative Easing that plays out over time and we are entering the time, in my opinion, where the cheese is beginning to bind.
Then we have the equity markets, singularly driven by all of this newly created money, which are dislocated from the underlying economies which eventually, and I think eventually is now at our doorsteps, begins to notice that something is amiss. Yet even laying relative valuations aside we are beginning to notice that revenues and profits are shrinking at many U.S. corporations as the European effect takes place, as consumers spend less because of their shrinking cash flows and as people become fearful that we are, in fact, living in some kind of central bank created bubble.
“In business, words are words; explanations are explanations, promises are promises, but only performance is reality.”
-Harold S. Geneen
We are also witnessing, I believe, the effects of reality and not what the fantasy accounting of all of the governments on Earth would lead us to believe. America may say that the unemployment rate is 7.7% but the reality is 11.6% and so the 33% differential means far less buying power in the economy which is beginning to be recognized. In Europe we can point to the uncounted liabilities in their sovereign debt numbers and then the reality there that just because liabilities are not counted does not mean that they must eventually get paid. Then the confiscation of assets in Ireland, Greece and Cyprus and the unpaid bills in these countries and in Spain, Portugal et al finally must be reckoned with so that large chunks of money leave the economy when eventuality wanders into the present. The falsification of data has taken some time to become realized but I think we are now at a moment when the truth of all of this has found roots.
Many banks in Europe are also beginning to suffer. They have pledged assets at the ECB which have deteriorated and the ECB will not be taking the hit I can assure you so that additional demands for collateral have been made. Some are just the responsibility of a given bank but some securitizations are guaranteed by the sovereign and so one or the other will have to foot the bill. I expect quite severe pressure on the balance sheets of many of the European banks during the next year as further collateral demands are made by the ECB and as these securitizations mature.
One possibility for the markets to reverse has always been some grand event but another is just the economic deterioration that wears away at the markets as current levels cannot be rationally supported. It is not just the Law of Diminishing Returns which is coming into play as the central banks create more money but the effects on the consumer of seriously declining available cash to be used to purchase goods and services.
We have been subject to a massive amount of monetary printing and an unconscionable manipulation of data but the affects of reality cannot be ignored forever because reality forces the consequences as the fantasy gives way over time.
“Reality is that which, when you stop believing in it, doesn't go away.”
-Philip K. Dick
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Oh what a tangled web they weave when first they practice to deceive.
Turn dat frown upside down mon...
The banks, the banks, the banks.
Only banks are not permitted to go bankrupt
Reality is their illusion
.
Their fiction is the reality
.
Just think Harry Potter, Twilight, Hunger Games, Walking Dead, Vampire Diaries, etc...you get the 'picture'
About that "economic deterioration"....
"...more than 20 shot on one Chicago day...."
"The city’s first 80-degree day in seven months brought a wave of violence, with an average of one per hour at one point, NBCChicago.com reported."
Full story:
http://usnews.nbcnews.com/_news/2013/05/02/18013866-10-year-old-boy-amon...
Instead of turning on the pigs, the rats turn on each other..
if anyone is counting, I can't,
we may actually get the answer to the
riddle "how many angels can dance on the head
of a pin?"
I guess it was always assumed there is a limit.
I reject your reality and substitute my own.
hope the market remembers we have US data coming out in a minute
it would be fun if the fed just attached fun keywords in a non-visible font to the bottom of their releases for the benefit of the algos as if they were trying to generate improved clicks.
things like: horrific, depression, outstanding, never-before-seen crash, unmitigated disaster, gold standard, silver bitchez,
I mean, The Bernank's gotta have some fun on his way out, right?
I'm ready for the next cycle. I have my cans of salmon, sacks of rice, solid silver, and cans of ammo in order.
However, I'm not sure the bankster-politicians are ready for the next cycle:
http://www.youtube.com/watch?feature=player_detailpage&v=4Z9WVZddH9w#t=9...
That gave me a hankering for a cuban sandwich. Think I'll break into my Spam reserves.
The stones are murmmering...
Oh it didn't work up to now, so must try more of the same.....
How thick are these people??
I eagerly await when the food stamp frauds, buying top of the line food items and living a life of luxury, feel the pain.
I think I'll go help my landlady take out her garbage.
"while reported unemployment in the U.S. has declined slightly the money pumped into the system has not accomplished one of the stated goals of the Fed which is to significantly reduce unemployment."
Ah, you're confusing excuses with reasons.
"The name "Objectivism" derives from the idea that human knowledge and values are objective: they exist and are determined by the nature of reality, to be discovered by one's mind, and are not created by the thoughts one has."
OK...so reality IS the Fed and other central banks manipulating shit. The reality IS the markets are going up mainly due to the above.
Hence..."don't fight the Fed" IS reality. No?
According to Karl Poppers' widly accepted theories, when dealing with the distinction of objective and subjective realities, there are three worlds.
World 1: The obective world of things and processes which we observe.
World 2: The subjective world (the world of the individuals' interpretation or the objective world).
World 3: The objective world of thoughts and ideas (theories, designs, concepts, models and concepts).
According to Popper, the Fed would not be exclusive to any one world, but infact exists in all three. It not only is reality, but also exists in our subjective minds. It is also is an example of a model of reality, (a part of common knowledge, a conjecture or map of reality).
In World 3, models which are perceived to be working and form 'our' reality, are models and ideas which can stand the test of time. This means that although the Fed is presented as an existing 'working' model and affects the other two worlds, is only a 'working model' until proven otherwise by refutation or revision.
Unlike objective reality, which is exlusive to World 1, fighting the Fed exists in all three Worlds, and therefore is reality and also affects all three Worlds. Unfortunately for many people, due to the way reality is presented to them, they are not aware of the fallacy of certain monetary policies and theories. They are only aware that the Fed exists in World 1 and World 2.
Maybe, now is the time that conscious and enquiring minds are beginning to see that the Fed and Keynsian monetary policy merely serves to corroberate each other, and the imposing authoritive dogmatic model. Although the Fed is not created specifically by 'our' minds, it can be both created, and can also be destroyed my 'our' minds.
I have to say that Mark Grant is my favorite author on here. Unlike speed reading some of these posts I read his very closely. In the above quote, "Next we have not had any inflation", I would say Mr. Grant must really live the high life in the world of finance and doesn't shop for groceries and the other daily needs of us "commoners".
There is indeed serious inflation in food, clothing, and other typical frequent purchases.
I will still look forware to Mr. Grant's posts. Nobody can be 100% accurate 100% of the time.
@Zero:
Well ... what is it dude? Is there more ... or less ... 'money'? You cannot have it both ways.
More cash, but less purchasing power for the consumer (debasement) = less available cash to buy stuff?
And finally the DT's aka the Hindenburg effect
Oh, the humanity!
According to Canaccord Genuity:
http://fs1.hidemyass.com/download/oiJmn/l0dnjl73ag6ihmioaubg7u3a46
HURRY UP AND WAIT
We have been anticipating a correction over recent weeks, and we see no reason to change that view. Our reasons for expecting a pause in the upside remain tactical in nature because the fundamentals that have driven the rally since the 2009 low continue to be in place. We expect a correction because (1) the equity market is near-term overbought and somewhat extended above its 200-day moving average, and (2) the current move higher is the second longest without a 5% correction since the 2009 low. A 5% correction from the recent peak of would bring the SPX very close to our 1500 near-term correction target. As you all know, we believe the intermediate-term fundamental, historical and tactical framework command buying the equity market on any correction – especially one that is +/- 5%. Our 2013 target remains 1760, which assumes a 16 multiple on $110 EPS for the SPX.
Definition of insanity. Before we convince you there could be a 5% correction, we need to convince you the backdrop remains so favorable for domestic equities that any weakness should be used as an opportunity to add exposure. Remember that corrections are only natural, normal and healthy until they actually happen. The definition of insanity is doing the same thing over and over, but expecting a different result. The fundamental drivers of the equity market have not changed throughout this entire cycle, yet many continue to find reasons they won’t work. Those favorable drivers have been:
1. Low core inflation (Figure 1),
2. Historically accommodative monetary policy as seen in the real Fed Funds rate (Figure 2),
3. Improving money availability and steep yield curve (Figure 3),
4. Slow but positive economic activity,
5. Directionally positive EPS and upward trend in valuation levels.
Investing is not an academic study. Is it a cause for concern that the Fed is artificially keeping rates lower than where they should be? Not based on the past four years. Continued deceleration in core inflation is giving the Fed cover to keep rates abnormally low, which improves the availability of money that leads to positive growth for the economy and therefore corporate America. The very smart-sounding counter to these factors are weak domestic economic and employment growth, a meaningful slowdown in growth in China, and the recessionary environment in the Eurozone. These factors are real, and over the past few years they have caused corrections, but have not been the ultimate driver of stocks – the guys printing the money have. We try not to get wrapped up in whether that is right or wrong because it just is what it is – practically positive for domestic equities.