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Financial Market Russian Roulette
Originally posted at Monty Pelerin's World blog,
A couple of points are important:
- The current level of the stock market is a function of quantitative easing. Neither fundamentals nor conditions in the economy justify financial asset prices where they currently are. Suggestions that QE is about to lessen or stop will produce sell-offs in markets.
- If the Federal Reserve cuts QE, it will not be based on economic considerations. The government is illiquid without the Fed buying/underwriting their bond sales. QE, if it is to drop at all, will drop in line with shrinking federal deficits.
No market can remain overvalued forever. However, a market can remain overvalued longer than rationality suggests and even go higher from these levels.
The government is in a box. They cannot sustain the level of spending they are currently at with tax revenues or conventional borrowing. Government is dependent on the Fed to fund its deficits via the QE scheme of money creation. Politicians in Washington will not willingly cut spending. So long as the Fed continues to be The Great Enabler, the uncontrolled spending will continue.
The Fed knows its QE has no effect on the economy. All it is doing is providing the fuel for political excesses. Stopping QE causes government checks to bounce. The Fed is not an independent agency and will not cross its master by doing what should have been done a long time ago.
The economy is not recovering and cannot recover. Government is planning to increase spending even more. Incentives encourage more people to enter the welfare state. ObamaCare will overrun spending estimates. The passage of the immigration bill, so lusted for by the political class, has been estimated to cost an additional $6 Trillion in spending. Playing in Syria is not free. No future natural or terrorist events are budgeted for. So long as the Fed makes spending painless, no cuts in government are coming.
The Fed knows its actions are not helping the economy recover. They have five years of data that supports my contention. If they were ever an independent agency, they are no longer. They have become entirely politicized and owned by the political class. They will continue to carry the water for their political masters.
Continuation and expansion of Fed liquidity may hold markets up or even drive them much higher. At some point the entire scheme crashes, probably when enough people recognize that the greater fool theory is in danger of exhausting the quantity of fools. The drop in markets is likely to come about as a result of one of the following factors:
- High inflation breaks out which causes the economy to further decline and shifts the perceptions of market participants in a way that causes them to recognize the Fed fraud.
- The Fed stops enabling the wastrels in Washington and government is unable to meet obligations or forced to dramatically cut its spending.
Neither the ending nor its timing can be forecast with any accuracy. Markets may continue higher as this drama plays out with future Fed announcements and deceptions. Markets, however, cannot levitate forever. Eventually they coincide with reality, which in this case probably means another major market correction.
All Ponzi schemes have limits. Participating in these markets is akin to playing a version of Russian roulette. If the chamber is empty, you make money. If not, you financially die.
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Click, click, BOOM!
Nicky! Nicky! Don't do it!
Walken was great in The Deer Hunter.
Tough mkt.
Bids suck, too many out there.
Good time to buy hi-yield, but where's the bottom?
This needs to settle and it will eventually. Tie a knot and hold on!
You could have written this article 5 years ago and it wouldn't have been any less true. The US stock market is the dirtiest operation on the planet, and has been for decades. Built exclusively for the 1%.
"One shot?"
Bernanke: We play with three bullets! Three! One-two-three!!
"At some point the entire scheme crashes, probably when enough people recognize that the greater fool theory is in danger of exhausting the quantity of fools."
This is why "they" want immigration reform.
Illegal immigrants, come out of the shadows and be an "official" new debt slave (fool).
The bottom of the Ponzi is tapped out, we need a new layer.
More important to the sickos,a major war along with new meat "Immigrants".
"Let me tell you something, pendejo. You pull any of your crazy shit with us, you flash a piece out on the lanes, I'll take it away from you, stick it up your ass and pull the fucking trigger 'til it goes "click". - Jesus Quintana
"One Shot"
Is that a picture of sprott after todays bludgeoning?? Wait till he is forced to sell all of those bars....
Bernanke has some balls eh Kito? I mean to insist on tapering with the 800lb gorilla in the room that must be addressed. You know the Gorilla right? Rapidly falling inflation. Otherwise known as deflation. This deflation is going to have to be addressed, sooner than later. When he pulls his hamstring in July and gets replaced by Yellen how do you think she will go about combating this deflation?
Deflation??!! Shhh.....you will become a pariah here for mentioning that.........
Had to go buy an present for my son's friend's birthday party. All action figures that were $6 last Christmas are now $10 each.
I wish for deflation. All I see is inflation.
You can't eat your action figure.
Wanted to rent Chainsaw from Home depot was 40$ for 4 hours last month is 46$ as of last night.
im growing a tad weary of hearing about all of this massive price increase as a result of inflation.................there is NOT an across the board inflationary sparked price increase in everything...thats bullshit.....look at the prices of all raw materials since the peak in 2008.......commodities as a whole have gone nowhere......NOWHERE.....in 5 years........some have risen...like beef.....but commodities as a whole have gone nowhere......and last i checked, raw materials are fairly important in pricing the finished product.........ive been buying the same box of pasta that hasnt moved in price in 2 years...same for some of my canned goods.....ketchup is the same.....24 pack of paper towels are the same in the past year.....lots of staple items we purchase from the supermarket havent budged in 1-2 years....that being said.....my health insurance increases are unsustainable, as is the rising cost of college......
@fonz
BernanQE or QyEllen, the "Deflation Monster" will win.
Like I've been saying. Big deflation and then woosh the dollar isn't worth shit.
I'll process that thought Doc, but I see it the other way around. In the grand scheme, money from heaven 'till nobody wants it...then the capital "D."
Guess I'm stuck on "Crackup Boom." Just haven't found enough examples of great empires destroyed by hyper-deflation in the annuls of history, yet no empires of old are still around today.
CB's lose all control in runaway deflation. They own the money, therefor will decide it's value. In the last big one, gld/slv had a say in matters. They were widely circulated. Today there are few checks and balances insuring value of medium. Well, not really medium of exchange, more like promissory notes.
My book is on the Fed's capability to produce data/bits faster than they are liquidated, at least for now. Later? The Storming of the Bastille 2.0?
Woah there, kito...discount bars? Can't let a good crisis go to waste. Need a bigger truck. Just give me one more 2001 and I'll ride off into the sunset, content.
i would wait til 15 or so before buying.......im fairly sure at that point sprott will have folded...............make no mistake about it....silver has much further to fall as sprott and others will be liquidating their stashes...........................
why would sprott be liquidating?
I don't follow.
you think there isnt a investor stampede fonz???? i really doubt the ones holding "silver" in his fund are the die-hard silverbugs...im not a silverbug and there is no way id put my silver in anybodys "trust"...so i figure the types investing in sprott are the types to fold fast....and hard.....
Couldn't agree more. We will go from Inflation bias to Deflation bias many more times before this settles. Volatility is our friend.
And, sprott sized institutions can't deliver quarterly statements in the red for long without assuaging the troops.
exactly professor...and when he is force to unload all of those silver bars...look out below............
Bloom to Boom! in one generation......golf clap, thanks wall street for a job well done
A very succinct, very accurate analysis of our predicament.
Yes, good article.
I don't believe we are on the cusp, yet, of a cliff dive of the markets. Just a swoon in reaction to yesterday. The Fed really cannot end QE and will not end QE unless inflation gets out of hand (1st bullet above). That is why I continue to buy PMs when I can.
On some level this talk of tapering may just have been a test to see what the reaction would be. The reaction has not been good. Ergo, QE will not end for quite awhile.
Bernanke is like a farmer carrying pails of slop at meal time. He approaches the animals, they all start honking and squawking, he drops his load, there's a feeding frenzy, he warns that there may not be as much slop next time, and then he's gone.
What is the point of collateral, at this point in the game? Accepting a promise that won't be honored is ok if one uses an intermediary?
My new word of the day is wastrel...right up there with rehypothecation. I am getting quite an education here and I did'nt have to get no stinkin "student loan". Thanks Tyler!
My word of the day is 'puzzling'.
Well if he was 'puzzled' yesterday today he is going to be completely 'perplexed' when 10Y yields hit 2.5%.
Lost control of them he did.
"One shot."
Ours is a golden bullet.
Do Kyle Bass, Charles Hugh Smith and Rick Santelli ever endorse anyone for office? If no, is there another way to figure out their picks?
They probably don't vote. Bass is on record saying he has given up on DC.
Decentralization, bitchez.
We, each and every one of us, have to be the lone leader(s) of this war (because face it, war has been declared on each and every one of us).
I'll bet everything I've got on red, please.
You appear to be winning as everything looks red right now.
I dunno though, Joe W and Henry B on BusinessInsider say it's a great time to buy right now, especially now that there is a dip. Why would they lie??
@drink or die
BI has a permanent buy rating on AMZN.
Like NAR, always a great time to buy a house.
What do you expect when you take the heroin away from the addict? It is going to get ugly.
So, what will Ben do?
1. Keep the juice going? Problem with that is the addict requires more and more to achieve the same level of euphoria and eventually it kills him.
2. Ease the addict's pain with methadone?
3. Cold turkey! Let the withdrawal begin. After much pain, the addict finally reaches a solid and much healthier footing from which honest growth can resume. As Ben is a Keynesian who believes in the juice, I expect option 3 is off the table.
Only means to keep this "going" is via ever lower yields allowing ever lower interest costs allowing ever greater leverage.
There is no walking this back or "methadone" treatment...that will surely kill the patient. Only way to keep it alive is forward even if it only means alive for another day or week or year...for those in charge, better than dead for sure today.
If bond yields are not arrested and turned lower in the short term, the game ends. Plus, itl's all about relative yields, it's about rolling over sick CRE or marginal companies to ever lower yields to keep them alive. If new relative lows cannot be struck, it ends.
This decision in the Fed's hands is exactly the moment all PM holders have been anticipating. Given Feds track record, PM holders will go from despair to elation in short order.
Polish Shock Therapy.
guys dont worry. fed will save the day???
I'm stacking, get out of the way.
this guy pretty much nails it
https://www.smashwords.com/books/view/312882
What a fucking blood bath (and the day ain't over yet).
is it the big sell off? who knows. there have been 5-10 head fakes in the past 5 years. oh, it's coming...but stating when is a suckers game.
"Mom's going to fix it all soon. Mom's coming around to put it back the way it ought to be." tool
Why is reality always a valuation based on the current market crashing through the floor?
Why can't we just have a market that traded on current fundamentals and true economic performance?
Reality is the ground, but the market trades in the stratosphere. I don't get it.
I talk to financial people and they all tell me the market is of course not trading based on the reality of the moment, the market trades based on future prospects. That if the market traded on current conditions, there would be no money to be made. They tell me the point is to risk money for a greater return when future growth allows corporations to become more profitable, making current valuations seem low.
When I say, "Well we've been told the economy is going to recover soon for the past four years. When stocks priced in a huge recovery in 2010, that didn't happen, they didn't give back their gains. Same thing with 2011, 2012, and 2013 so far. How far ahead is the market looking? I don't see a 1000x increase in economic activity that can allow some stocks to grow into their valuations."
I get in response, "Well all that means is that when we do get the recovery, it will rebound much higher and much faster."
I say, "Well, what if it doesn't?"
Response, "You can only keep demand down for so long. Sooner or later people will want to buy more stuff. There will always be growth in the economy."
I walk away dumbfounded realizing that you can't argue with an idiot who believes the path to prosperity is a life without work, and consumption without worth.
oh look, a buying opportunity.
Somebody help me.
If the Fed Govt revenue is 2.5 trillion
and the spending is 3.5 trillion leaving
a deficit of 1 trillion per year
or
83.3 billion monthly
and QE is 85 billion monthly
How does the FED tell their overlords to shove their spending up their asses?
Because if the Fed reserve is to "taper", it will be at the expense of FedGovt spending!
Let me add to that.... borrowing costs have just risen sharply.
The Federal Reserve does not serve the federal government. It never has, never will. It serves private banks.
The Fed creates digital money from nothing and loans it virtually interest free to private banks, who then can do whatever they want with it. They can buy anything, they can trade, they can speculate. That's the main function. If the banks go bust money is destroyed, but simply recreated with the push of a button a few seconds later, and given to the banks again.
A secondary function of the Fed is to mop up assets to drive interest rates on them as low as they can go, such as buying Treasury bonds. Why does the Fed want to drive interest rates low? Because low interest = more credit = more dollars. Any rise in interest rates wipes out credit and therefore wipes out dollars, and this is the deflation that must not be allowed because it hurts private banks who only make money on inflation/deflation cycles, and cannot tolerate a sustained deflation. It doesn't care about how or what the government spends dollars on.
Ok so how does this all end? Where is it headed? Hell if I know. We've never been here before because money has never been so free and easy as it is now. My guess is this:
1) Eventually the rest of the world tires of holding depreciating dollars. They stop using them and stop buying treasuries altogether, because treasuries can only offer negative real returns.
2) If the Fed becomes the sole buyer of treasuries and nobody is holding dollars overseas anymore, it's game over because then you either have government default or domestic hyperinflation. The Fed can be a major buyer, but it can never be the sole buyer, remember that.
Can't you follow the link?
Who funds the deficit? The treasury Dept. They issue bonds.
Who buys bonds? The banks, the big banks.
Where do they get their funding? THE FED.
Therefore the FED FUNDS GOVT
All the expert money managers are saying to buy stocks and bonds. Buy the dip, even though Benny is pulling the drip. If the economy is so great, then tax revenues should be rising and deficits falling. What the experts forget is that over half the people in this country pay no taxes. As with all things government, I'll halfway believe it when I see it.
Isn't the end game one big global bank with it's SDR currency called electronic money. The internationalization or better still the hegemony of transnational finance requires smashing national currencies into the dirt. Then the hegemonic transnationalists swoop up assets and are given control by the hired political class. This gambit probably will work for the Western powers --NATO bucks.
With UST now at 2.44%, can someone tell me why 2.5% is a "come to Jesus" event, as has been mentioned here on ZH?
We cannot, on the one hand, say that the Fed is the market and on the other be surprised that somehow when things deteriorate, that this is the "free market" reacting. If the Fed is the market, then the market is the Fed: everything is centrally planned so don't be surprised by moves. It is all by design and a distraction. The real question is: what is the other hand doing?
Also controlled by corporate America.
Don't worry. If you don't want to play in the markets, the bank, which you gave all your money to will do it for you!