All I Want For Christmas Is The S&P (The Las Vegas Period)

Tyler Durden's picture

From Paul Mylchreest of Monument Securities

We are approaching a critical point (again) in the “battle royal” between the forces of inflation and deflation. Deflationary forces are threatening to overwhelm the reflationary push-back of the world’s central banks - although this is not reflected in most equity markets (especially the US). Open-ended QE was only announced by the Fed last Autumn, but the impact on (market-based) inflation expectations plateaued within months and has started turning down.

I am no fan of QE, but the Fed is discussing scaling back its preferred reflationary policy tool when the economic cycle is at one of the weaker points since the recovery began in early-2009. This is probably a bluff, or would be a temporary measure at most. With recent support for scaling back from the BIS and IMF, it’s questionable whether there’s a coordinated attempt to talk the dollar up...just as BRICS nations are stepping up their efforts to undermine it (see “Encore” section)? Or is talk of bubbles impacting their fervour?

In equities, previously reliable valuation models based on ISM/PMIs are breaking down - likely due to QE. Correlations between equity markets and various other financial assets and economic indicators are also diverging as the S&P 500 powers ever higher. Currently, few people seem to (even) entertain the notion that western equity markets could see a short-term correction. Maybe that’s “correct” - in light of the mechanics of “full-blown” QE as explained in the report - but it is worryingly reminiscent of bubble mentality.

As we show in the report, the monetary system in the US has changed dramatically since the 2008 collapse of Lehman and the implementation of QE. This goes right to the heart of how NEW MONEY IS CREATED (QE not loans), who creates it (the Fed not the banks) and who gets to use it first (banks not borrowers).

As far as it’s possible to tell, this change appears to have had a very positive impact on equities via the banking system. The chart below shows the surprisingly close correlation between the S&P 500 and the “deposit to loan gap” in US commercial banks. The “deposit to loan gap” is a direct result of QE programmes and currently amounts to more than US$2 trillion. These excess deposits create an “investment need” for the banking system and the collective ability to distort asset prices. This is discussed in more detail below. The question is how much has found its way into equities and what impact will these flows have going forward.

A decision to taper QE would obviously be negative for equities in the absence of a sufficiently strong offsetting improvement in economic fundamentals – which is difficult to envisage right now.

While QE is benefiting risk assets on the one hand, it is also disrupting the flow of collateral in the vast shadow banking system on the other. QE programmes “silo” securities which could be used as collateral several times over via hypothecation and re-hypothecation. This reduces collateral velocity and (all important) system liquidity. Recent work by the IMF and the US Treasury has highlighted this, as well as the gross shortage (multi trillions of dollars) of high-quality collateral under “stressed market conditions” (see below).

Let’s just hope we don’t have stressed market conditions.

* * *

Encore - Inflationary Deflation: end-game update

Brief summary: Excessive monetary stimulus and low interest rates create financial bubbles. This is the biggest debt bubble in history. It is a potent deflationary force and central banks are forced into deploying increasingly aggressive (offsetting) inflationary forces. The avoidance of a typical deflationary resolution to this economic long (Kondratieff) wave is pushing the existing monetary system beyond the point of no return. The purchasing power of the developed world’s  currencies will have to bear the brunt of the “adjustment”. Preparations for this by the BRICS nations, led by China, are advancing rapidly. The end-game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system. A new “basket” currency is likely to replace the dollar as the world’s reserve currency. The “Inflationary Deflation” paradox refers to the coming rise in the price of almost everything in conventional money and simultaneous fall in terms of gold.

* * *

I think that we have crossed an important threshold in the “Gold War”. Rather than scaring investors out of gold and silver, the price collapse and the circumstances surrounding it has led to a well-publicised rush to purchase gold by investors across the globe.

Two things came together causing the perfect storm for bullion demand in both the East and West – the fall in prices in conjunction with excessive monetary stimulus AND the Cyprus “bail-in” of depositors’ money (and the realisation that other countries were formulating similar plans in the event of bank failures).

We’ve seen rising premiums against spot for bullion products and extended delivery times. There have been occasional examples of this before, notably late 2008, but never on a sustained basis, which would have dramatic ramifications.

The recognition in the gold market of the profound difference between physical gold versus and mere “paper claims” has been on the horizon for years. My sense is that there’s been a dramatic step forward in the understanding of the fractional reserve nature of these markets.

I’ve been told that a high-profile hedge fund manager and gold advocate had a similar realisation a while back. While arranging to move his gold out of the banking system, he (apparently) asked what would happen when more people realised the true situation. The reply:

”Price discovery.”

It’s a great irony that the monetary metals in the form of physical gold and silver are the only financial assets which have no counterparty risk in the midst of the world’s biggest debt crisis...and so few people see the investment case.

* * *

Full report below

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idea_hamster's picture

You'll shoot your eye out.

Precious's picture

Last December 25th I got laid.  That's all the news fit to print.

Cursive's picture

QE is killing the real economy.  A political decision must be made:  do we care more about Johnny Paycheck or the SPX?  Unfortuantely, hedge funds and IB's are bigger political contributors than J6P.

otto skorzeny's picture

as long as johnny paycheck is no threat to drag you out of your bed in the middle of the night- do you think TPTB really give a rat's ass about johnny paycheck?

Cursive's picture

@otto skorzeny

No, until there is action in the streets, there will be no action in the halls of power.  OWS was an interesting step, but a fail nonetheless.

Harbanger's picture

Action in the streets without a defined purpose means nothing. It all plays right into their game of "we will save you from the crazies" (which they have purposely brought forth upon us). The only choice given to us is to accept their fascist regime for your own safety. What have we become lord? All I can hope for is the strenght of our spirit that we may have the courage to find ourselves.

buzzsaw99's picture

a decision had to be made... [/riff raff]

AssFire's picture

The 30% reduction in the average speed of the world's merchant fleet since 09 was very telling.. Slow boat form china now really slow boat from china.

infinity8's picture

I'd like to see that chart go back further. In my experience, my shop saw a huge influx of business starting in late '06/early '07 precisely due to lead times for overseas fabrication and shipping costs. JIT snapped before other things did cost-wise.

Dr. Engali's picture

"It’s a great irony that the monetary metals in the form of physical gold and silver are the only financial assets which have no counterparty risk in the midst of the world’s biggest debt crisis...and so few people see the investment case."

And this is exactly why gold and silver isn't anywhere near bubble territory. Most people are still selling what gold they have at the we buy gold shops.

StarTedStackin''s picture

Most people are selling?



I've recently read it's 50:1 buying , unless you are refering to places you can't buy......

Dr. Engali's picture

I should have been clearer....The people who live pay check to pay check are selling what gold they have to survive. Nobody who buys precious metals deals with the "we buy gold here' shops. Paper asset investors still haven't bought into precious metals. They don't understand them.

disabledvet's picture

your confronting cartel based economic systems should these Fed "QE" policies proceed. If I control product, price and distribution (natural gas prices have rallied strongly of their 2 dollar panic lows) then provided i have the right bankers (all of Wall Street is in on this one) then "EYE" am the market. gold...and silver...are pretty much irrelevant as the "mega cash" is being "sucked in" to create a consumer class that will do just that...consume the oil, natural gas and distillate production. and many other things as well. couldn't be done with Glass/Stegall...but with that repealed these types of organizations can now flourish. that's why exports really aren't a big part of the US approach to recovery. "internal demand" how all economic recoveries have been generated...certainly since World War II...and pretty much throughout the entirety of American economic history.

realtick's picture

are there cliffs notes available for this?

HulkHogan's picture

Yep. No better time to buy stocks!

q99x2's picture

Gold and silver platinum and soon bargain basement prices on copper.

Milton'sParadise Lost describes a fallen angel who values earthly treasure over all other things.[11][12] Later occultist writings such as Jacques Collin de Plancy's Dictionnaire Infernal describe Mammon as Hell's ambassador to England

Just saying.

StarTedStackin''s picture

Don't mistake the old 'markets'  for the new normal (corruption)......

StarTedStackin''s picture

physical gold and silver will continue to be a 'bad investment', until no more is available........

StarTedStackin''s picture

Tyler, (et al)



If "Both parties are the same", why did not Bernanke, under Bush, institute quantitative easement?






HulkHogan's picture

It started under Bush. They bought up bad debt from the banks first, then started giving them money (QE1) on Nov 25, 2008. Obama's first day in office was on Jan 20, 2009.

ebworthen's picture

The only "taper" is going to be the shape of Bernanke's logs he lays in the Golden toilet at Marriner Eccles.

realtick's picture

if this guy wants to blatantly bite my chart style that's fine with me - i'll take it as a compliment

if you guys want to know what the price of gold is going to do - watch the yen

Cabreado's picture

"We are approaching a critical point (again) in the “battle royal” between the forces of inflation and deflation"

No, we have arrived at a critical point where the inflation/deflation argument is old, tired, ignorant, and self-absorbed.

We have arrived at a critical point (again) where a critical mass of the self-absorbed have infested points of influence and control.

Only in ignorance and self-absorption will you still be playing inflation/deflation games, while neglecting control, corruption and chaos.

AldoHux_IV's picture

Agreed so sick of the inflation/deflation masterbate-- like 2 idiots arguing wheter the sky is black or white.

disabledvet's picture

no need to worry about it. we will watch Japan proceed with theirs and learn. that one will be MANICHEAN not the American one. (the result might not be Manichean in nature however...but the debate sure will be.) Here's your historical parallel for Japan relative to a market crash:

J in Vegas's picture

So What"s up ZH posse! Just got back to the crib after golfing at Willow Springs. We shot back to back 18 rounds. Oh so faded on the double back 18. Crown Royal shots X3 Oh Snap!!!!!!!!!!!!!!!!!!!!!!

So left the golf course. Driving the WRX today as the wife is driving the VOLT! Hate away haters. 18.5 gallons of gas in 6+ months! So Faded! Miss driving the WRX! The VOLT is economical but no fun . The WRX is fun, 300HP, 271 TOQ, Modified, so fun. 800 watt stereo, fun, Fun, FUN!

Rolling along the 215 towards Mountains Edge, rolling. Stereo blastin' ,havin' fun. Got home.... NO PIGS OUT! Rollin! Wife Just got home. Typing away on ZH . FADED! Have fun ZH Posse! PLay'n the Itunes! Don't hate. 22K songs on there. Ben Building the song list since 2003 in L.A. Ben building songz before Benny ben building Bull$hiot Fed Re$erves! Oh Snap!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Have fun... going back to work to the strip for the big weekend !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Bartender PIMP!!!@!!!!

J in Vegas!!!!

ebworthen's picture

You are burning coal with that Volt, don't fool yourself.

Enjoy it all while you can seems to be the meme.

J in Vegas's picture

As along as the coal is USA made I don"t care... ... As I have said before 67% of Nevada power is Nat Gas... And they are just flaring that $hit off in North Dakota. Burning it off. Just Waste. Trust me, as soon as I can afford solar panels, its on! I'm faded...... bad news on ZH/ The wife knows to leave me alone. The urban garden is all good today. Looking at grapes, onions, olives, pears, apples, figs, rasperries, and $hit bitchEz!

ebworthen's picture

Like I said, enjoy it while you can.

disabledvet's picture

even throw a war in for ya..."just for shits and giggles."

J in Vegas's picture

As  I said, as soon as I have a solar panel its on--- . Enjoy what. A cheap load of energy from Nat Gas from fracking? Or water? Water from Lake Mead ? I have 10 years here in Vegas TOPS!. The water is going away, enjoy it while you can. Don't hate "ebworthen" , just enjoying the game while it lasts. Learning important skills like farming while I can, but don't hate! Esc. while I'm Drinkin"!

d edwards's picture

What better way to distract from the multitude of crimes committed by this regime than create a financial "crisis" with 0bummer coming out and saying: "All of these investigations are a distraction when we should be concentrating on jobs and the economy. Now I have to get back to the work of the American people!"


Can't you just see it?