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Every Asset That Depends On Cheap, Abundant Credit (Housing, Bonds, Stocks) Is Doomed

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Four words: financialization, debtocracy, diminishing returns.

About a month ago I asked What If Stocks, Bonds and Housing All Go Down Together? (May 24, 2013). Why would such an outrageous thought even occur to me?
 
Four words: financialization, debtocracy, diminishing returns. The entire global economy, developed and developing nations alike, is now dependent on cheap, abundant credit for everything: for "growth," for asset inflation, and ultimately for central state deficit spending, which props up all the cartels, rentier arrangements, fiefdoms and armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo.
 
I have long endeavored to explain the harsh reality of neofeudal, neocolonial financialization: Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012) and the neofeudal debtocracy that depends on low yields (interest rates) to enable enormous deficit spending: Why Krugman and the Keynesians Are Lackeys for the Neofeudal Debtocracy (April 24, 2013).
 
The wheels fall off the entire financialized debtocracy wagon once yields rise.There's nothing mysterious about this:
 
1. As interest rates/yields rise, all the existing bonds paying next to nothing plummet in market value
 
2. As mortgage rates rise, there's nobody left who can afford Housing Bubble 2.0 prices, so home prices fall off a cliff
 
3. Once you can get 5+% yield on cash again, few people are willing to risk capital in the equities markets in the hopes that they can earn more than 5% yield before the next crash wipes out 40% of their equity
 
4. As asset classes decline, lenders are wary of loaning money against these assets; if the collateral for the loan (real estate, bonds, stocks, etc.) are in a waterfall decline, no sane lender will risk capital on a bet that the collateral will be sufficient to cover losses should the borrower default.
 
Let's take a look at four charts about housing and household net worth. For the middle class, the home remains the key asset, so housing and household net worth are correlated.
 
Here is a chart of mortgage rates since 1970. Rates were pushed to 17+% to snuff inflation in the early 1980s, and they've dropped over the past 30 years to historic lows: the rate for a fixed-rate 30-year conventional mortgage was about 3.5% a few weeks ago. It has now risen above 4%.
 
In the golden age of growth from 1991 to 2002, mortgages rates bounced between about 7% and 9%. The band from 1970 to 1979 was about 7.5% to 10%.
 
In other words, in eras of strong growth and low inflation, mortgage rates have been around 7% to 9%. So what happens to the monthly payments when the mortgage rate doubles from 4% to 8%? The payments double, too. And what happens to the price of houses when rates double? They fall to the point that households borrowing money at 7.5% - 8% can afford to buy a house, i.e. a price much lower than today's Housing Bubble 2.0 prices.
 
Here's mortgage debt. If mortgage debt had expanded at the previous rate, total debt would be closer to $5 trillion instead of $10 trillion.
 
You see what happens when debt becomes cheap and abundant: debt rises faster than wages or assets.
 
But hasn't household wealth increased mightily in the past decades? Here is a chart that plots the relationship of household net worth and total credit owed, i.e. debt:
 
Household wealth may be rising, but what this chart reveals is debt is rising even faster--that's why the line is declining. Put another way, every dollar of new debt is generating less and less wealth.
 
You might think that The Federal Reserve's policy of making credit cheap and abundant would goose people to consume and invest more money. Alas, the velocity of money is hitting historic lows: the Fed may be creating credit but people and enterprises aren't putting that money into circulation.
 
It's called diminishing returns: every dollar of debt creates interest payments, but it's no longer doing households or enterprises any good. The Fatal Disease of the Status Quo: Diminishing Returns (May 1, 2013).
 
That's why all asset classes that depend on cheap, abundant credit are doomed: once yields/rates rise, the valuations of those assets implode. And once valuations implode, there's not enough collateral left to support the loans used buy all those cheap-credit-inflated assets. So the financial system also implodes.
 

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Fri, 06/21/2013 - 10:38 | 3679047 Joe Sixpack
Joe Sixpack's picture

Wow. The pro-taper crowd is in today at zerohedge. QE infinity! They have no other choice (even if it is not working).

Fri, 06/21/2013 - 10:40 | 3679059 Doubleguns
Doubleguns's picture

Results will be the same. 

Fri, 06/21/2013 - 10:41 | 3679062 Herd Redirectio...
Herd Redirection Committee's picture

The price of everything you own = DOWN

The price of everything you need = UP

Fri, 06/21/2013 - 10:46 | 3679077 Pladizow
Pladizow's picture

Every crack head that needs crack is fucked!

Fri, 06/21/2013 - 10:52 | 3679112 Oh regional Indian
Oh regional Indian's picture

Credit does not exist. There is only debt, masquerading as Credit, which we have been taught because it sounds better. To your credit etc.

It is a debt crisis and the other side of debt is not credit, but a counter-party/underlying asset.

Big switcheroo.

Too much liquidity and now everyone is drowning. From here to the FEd shutting off the tap is really near, 1929 redux.

ori

http://aadivaahan.wordpress.com/2013/06/21/strange-days-especially-now-t...

Fri, 06/21/2013 - 10:55 | 3679120 gmrpeabody
gmrpeabody's picture

There will be no shutting off of the tap..., at least until we have no budget deficits.

Fri, 06/21/2013 - 10:58 | 3679130 zerozulu
zerozulu's picture

Nothing to worry about if you believed you are on your own.

Fri, 06/21/2013 - 11:26 | 3679199 Pinto Currency
Pinto Currency's picture

 

The question of what happens to the $100 trillion worldwide that sits in debt instruments has not been answered in this article.

As interest rates rise, defaults increase, and bonds lose value, bond holders are not just going to sit there.

Many bond holders will sell and buy assets of inate value driving up the price of those assets.

Energy, food production, precious metals, etc.

Fri, 06/21/2013 - 11:29 | 3679241 Panafrican Funk...
Panafrican Funktron Robot's picture

http://www.bloomberg.com/quote/USGG10YR:IND

We are presently 1 hundreth of a percent away from IR swaps becoming a problem (2.5% on the 10 year).  

Fri, 06/21/2013 - 12:11 | 3679462 Herd Redirectio...
Herd Redirection Committee's picture

But betting on permanent low interest rates seemed such a good idea at the time!  Bernanke and Greenspan both told me they had my back!  /sarc

Fri, 06/21/2013 - 16:29 | 3680571 mjcOH1
mjcOH1's picture

"Every crack head that needs crack is fucked!"

Wait until the inner-city residents get priced out of crack and embrace meth.

It's cut a swath through rural-poor-white America already. They're not as effectively plugged into the multi-generational welfare benefit system, and crack cost is beyond their capacity to steal in low population density areas.

Only a matter of time.

Fri, 06/21/2013 - 11:14 | 3679193 NoDebt
NoDebt's picture

That's the right comment.

What the article missed is the most debt-dependent thing on the face of the Earth- the Federal Government of the United States.

When that "asset class" blows up, you won't care about little things like stawks, bawnds or reel estate.  Because they will already have confiscated or taxed away most of those things from you.

Fri, 06/21/2013 - 12:37 | 3679536 new game
new game's picture

The right action would be??? sell the mutha fucker, convert the cash to???

Hint: it is shiney and 1 lb is worth mucho. 50/50 $/G and wealthy renter/serf in disguise free to roam about.

One sold, one to go...

Fri, 06/21/2013 - 11:38 | 3679279 Diogenes
Diogenes's picture

Credit is a good thing to have, until you use it. Then it turns into debt which is a bad thing. I'm surprised this is so hard to figure out.

Fri, 06/21/2013 - 12:04 | 3679445 Seasmoke
Seasmoke's picture

kind of like a gun

Fri, 06/21/2013 - 15:31 | 3680321 dark_matter
dark_matter's picture

Yeah, I always loved those "turn your equity into cash" commercials. Should have been "turn your equity into debt".

Fri, 06/21/2013 - 10:55 | 3679080 El Viejo
El Viejo's picture

That's why they won't stop.  Can't stop until the cure(QE) is worse than the disease. That's when drug addicts quit. When they look in the mirror and finally admit the long term pain is just simply not worth the short term high. It's true with drugs, money, food, sex, power etc. 

Is your life style sustainable??

Fri, 06/21/2013 - 11:09 | 3679169 NidStyles
NidStyles's picture

No life is truly sustainable, if it were there would be no such thing as death.

Fri, 06/21/2013 - 11:39 | 3679284 Oh regional Indian
Oh regional Indian's picture

nice.....

Fri, 06/21/2013 - 12:03 | 3679438 Seasmoke
Seasmoke's picture

is that the cliffs notes version of the quote at the top of ZH

Fri, 06/21/2013 - 12:38 | 3679542 V in PA
V in PA's picture

He said life style. Is your life style truly sustainable?

Fri, 06/21/2013 - 11:22 | 3679215 NoDebt
NoDebt's picture

Here's a visual for you:  Imagine a politician having that moment of clarity you just described.  Looking himself in the mirror one day and saying "My GOD, what are we doing?  What am I doing?"

Can't imagine it, can you?  And with good reason.  Because it will never happen.  They are all politicians, not leaders.  Leaders can see the big picture, politicians can't (and wouldn't even if they could).

Fri, 06/21/2013 - 11:41 | 3679290 Diogenes
Diogenes's picture

"Interest rates are still low aren't they? So what's the problem?"

 

Or: It's not the drugs that hurt. It's going without them that hurts.

Fri, 06/21/2013 - 11:43 | 3679313 fuu
fuu's picture

"Here's a visual for you:  Imagine a politician having that moment of clarity you just described.  Looking himself in the mirror one day and saying "My GOD, what are we doing?  What am I doing?"

I saw a little old guy from Texas when I read that.

Fri, 06/21/2013 - 12:01 | 3679427 Seasmoke
Seasmoke's picture

i always want to think the Evan Bayh, had that mirror moment

Fri, 06/21/2013 - 13:00 | 3679602 Kirk2NCC1701
Kirk2NCC1701's picture

Not that I disagree, but given all the spying going on, as someone pointed out in the last few days, TPTB get to all key politicians who have 'unacceptable' ideas or intentions.

Very few who were 'clean' and actually managed to get elected, get to be the voice of reason, the John the Baptist, around whom the Dissidents can gravitate.

They are happy to have a few of these, as they too serve a purpose and get to be 'branded' as an 'un-electable' brand, but they just don't want them to get too large a following, nor can they risk of having them assume any position of real power. IMO.

Fri, 06/21/2013 - 11:46 | 3679334 kridkrid
kridkrid's picture

Mine isn't. And I suspect not many people lead sustainable lives. Sustainable isn't living debt free, putting money away... even if you are stacking it. Our world runs on cheap energy and cheap credit/debt. I don't think many people can grasp just how intertwined it all is. Your life is only sustainable if you live off of the grid and are completely self sufficient. Even if you are growing your own food, living off of the land... if you go to a feed store for chicken feed, or are using fertilizer other than compost, you are still tied to the system. If you feel good about yourself because you run your own business... most of the people who buy your goods and services are collecting a paycheck from some corporation or government entity. Hard to say what things might look like when the wheels fall off.

Fri, 06/21/2013 - 13:37 | 3679770 zerozulu
zerozulu's picture

Some time doctor thinks this patient is not worth saving.

Fri, 06/21/2013 - 10:50 | 3679088 DoChenRollingBearing
DoChenRollingBearing's picture

Every asset at risk of going down?  Uh, Canada is doing pretty well now, better than we in the USA are.  Resource rich Quebec included!  Yes, gold mining areas especially!

"Trip to Val d'Or, Quebec"  (Gold Valley...)

http://tinyurl.com/kla4uml

Fri, 06/21/2013 - 12:06 | 3679439 Thisson
Thisson's picture

Canada is very vulnerable.  Much of their economy is dependent upon exporting raw materials to China, made into final goods for US consumers.  So yes their economy and housing prices has/have been booming, but that may not last as China's growth slows.  And Gold Miners (even in Val D'Or, like AEM) are starting to sweat as gold costs and gold prices converge, narrowing their margins.  If real interest rates continue to rise, that does not bode well for gold either.  I like gold a lot here, but if the reason for other assets declining is rising real rates, gold could suffer and decline in correlation with stocks and bonds.  It's real purchasing power may still do pretty well, but it's something to be thinking about.

Fri, 06/21/2013 - 13:19 | 3679690 Kirk2NCC1701
Kirk2NCC1701's picture

Canada's Mfg industry got clobbered in this Recession/Depression, and they've down-shifted to the traditional primary industries.

The traditional model of being a branch-plant economy of the US has maxed out and shown its limits/weakness. Provincial governments are probably doing a better job than Ottawa, in creating the climate and infrastructure for Made in Canada industries.

And if/when such industries do evolve, they get culled by the US giants or politicians, lest they become too 'competitive'. E.g., Avro, Nortel, RIM.

Fri, 06/21/2013 - 11:02 | 3679147 cocoablini
cocoablini's picture

If inflation(money supply) is still falling even with 12 trillion in central bank injections then tapering will just drop us into a turbocharged deflation. Its preventing a total collapse, whether its being used badly or not. It should just go straight to consumers as tax breaks or freebies to juice spending but in the end the banks arenusing it to squat on.

Fri, 06/21/2013 - 11:11 | 3679176 TruthInSunshine
TruthInSunshine's picture

Canada (which depends heavily on the U.S. - its largest trading partner) & its twin, Australia (which depends heavily on China, its largest trading partner), are both in a state of collective, cognitive denial that is large enough to be fairly deemed "epic."

It's not that I have some burning desire (or any desire) to see the Canadian & Australian economies fare poorly; it's just that basic arithmetic ultimately catches up with all deniers and pummels them into bloody submission & admission of the truth.

Fri, 06/21/2013 - 11:19 | 3679206 Herd Redirectio...
Herd Redirection Committee's picture

I told my dad two days ago "If there is a recovery under way, why has the US stock market rallied 45% in the last 2.5 years, and the TSX is up 3% over that time?  Don't they need natural resources if the return to growth is imminent?"

Fri, 06/21/2013 - 11:52 | 3679366 gmrpeabody
gmrpeabody's picture

+100

Fri, 06/21/2013 - 11:15 | 3679194 1100-TACTICAL-12
1100-TACTICAL-12's picture

QE for the proles. 

Fri, 06/21/2013 - 11:33 | 3679257 Enceladus
Enceladus's picture

If my reading of earlier post here are correct the reason this can't happen i.e. direct payments to the hoi polloi is that it will be used to pay off debts. Thereby reducing over all credit/debt and that can't be allowed to happen as it is used as collateral in an infinite loop of rehyoped dirivatives. So, pull all your money out and pay off all your debt and the system dies ;)

Fri, 06/21/2013 - 15:31 | 3680323 BigJim
BigJim's picture

Sounds good to me

Fri, 06/21/2013 - 11:38 | 3679277 Panafrican Funk...
Panafrican Funktron Robot's picture

"but in the end the banks are using it to squat on."

Now consider the question of what the banks would like to have happen to those excess reserves, in terms of value.  Imagine the fire sale they could take advantage of.  

Fri, 06/21/2013 - 11:39 | 3679285 Stoploss
Stoploss's picture

It's called Biflation.

 

Fri, 06/21/2013 - 11:47 | 3679341 pods
pods's picture

I prefer to call it BiWinning.

-Charlie Sheen

Fri, 06/21/2013 - 11:45 | 3679327 Winston Smith 2009
Winston Smith 2009's picture

The price of everything you own = DOWN

The price of everything you need = UP

Only if you need to use what will be the very scarce credit to buy it.  If you have cash, silver or gold, stuff will be very, very cheap!  That's how the smart money made out after the Great Depression, they bought huge quantities of productive assets at deflationary depression prices.  There will probably be a deflationary depression followed by inflation, so there will be a window of opportunity.

Fri, 06/21/2013 - 13:06 | 3679628 Citxmech
Citxmech's picture

"The price of everything you own = DOWN

The price of everything you need = UP"

 

Bingo!  "Bi-Flation" defined.

Fri, 06/21/2013 - 11:05 | 3679157 tarsubil
tarsubil's picture

Yes, qualitatively both will result in pain. No, quantitatively QE infinity will result in more pain.

Fri, 06/21/2013 - 11:16 | 3679196 NidStyles
NidStyles's picture

Some people can not understand the distinction, because they can not understand that there is no "we", as in "we" are not all in this together.

Fri, 06/21/2013 - 10:41 | 3679060 localsavage
localsavage's picture

More like the people who passed basic math....

Fri, 06/21/2013 - 10:49 | 3679092 Midasking
Midasking's picture

There will be no taper only more coin clipping.  Just my opinion but either way is going to be a disaster.  http://tinyurl.com/mem7o7x

Fri, 06/21/2013 - 15:40 | 3680362 steelhead23
steelhead23's picture

I'm not so much pro-taper as I am pro-sanity.  Look at those graphs, particularly implied velocity.  People aren't spending.  Wanna know why?  Many were stung during 2008, either lost money in the markets, or lost their job/house in the recession.  Easy credit is a lousy substitute for a good job - a paycheck beats a credit card each and every time.  QE has had very little effect on wages, which are low due to labor arbitrage.  If bond yields continue to rise, and I think they will, QE will become irrelevant, the market will crash.  A massive government-funded jobs program, combined with QE might have worked, at least temporarily, but the sequestration budget is certain to lead to recession.  That's right - RECESSION.

Fri, 06/21/2013 - 10:38 | 3679053 justinius1969
justinius1969's picture

One almighty cluster-fuck dead ahead..

Fri, 06/21/2013 - 10:39 | 3679058 thismarketisrigged
thismarketisrigged's picture

today is prob the most volatility i have seen in a while. 

 

watching the banks on my level 2, the trades are insane, never seen this much consistent volatility in a long time.

 

it makes it more fun to watch that there all down 3 plus percent.

Fri, 06/21/2013 - 10:46 | 3679082 DeadFred
DeadFred's picture

I was thinking it was going to be one of those Nanex days. Everything is bouncing around like a bad day on the Neikki

Fri, 06/21/2013 - 10:52 | 3679113 thismarketisrigged
thismarketisrigged's picture

i hope we see volatility like we saw on the nikkei when they were down 7 percent a few weeks ago.

 

thatd be a great way to go into the weekend.

Fri, 06/21/2013 - 10:42 | 3679065 Seize Mars
Seize Mars's picture

Article quote:
"...armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo..."
So if I were the status quo, would they suck me off? Cuz I love that. You know, getting sucked off.

Fri, 06/21/2013 - 10:44 | 3679071 Joe Sixpack
Joe Sixpack's picture

Your comment sucks.

Fri, 06/21/2013 - 22:15 | 3681299 Seize Mars
Seize Mars's picture

Correct.

(Seize Mars can't be brilliant, witty and incisive all the time. Sometimes Seize Mars is just...wasting...time.)

Fri, 06/21/2013 - 10:44 | 3679069 fatman51
fatman51's picture

Since 2008 this blog has been predicting Weimar Republic. Now it is deflationary catastrophe?

Interest rise because there is inflation. Inflation erodes debt.

Fri, 06/21/2013 - 10:49 | 3679090 Herd Redirectio...
Herd Redirection Committee's picture

See: Ka-Poom Theory

Fri, 06/21/2013 - 10:49 | 3679096 Spitzer
Spitzer's picture

 Its all about inflation.

 

Look at the bout of deflation that Aregentina got before they went into hyperinflation.

 

http://www.latin-focus.com/content/countries/arg_gifs/argcpi.gif

 

 

Fri, 06/21/2013 - 11:29 | 3679242 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

Nice perspective, we can all be on guard for inflation even if we go down for now.

Fri, 06/21/2013 - 12:30 | 3679510 Ghordius
Ghordius's picture

+1

Fri, 06/21/2013 - 10:50 | 3679097 DeadFred
DeadFred's picture

First the deflationary catastrophe then the Weimer Republic. Did you sleep through ZH101?

Fri, 06/21/2013 - 10:50 | 3679099 nope-1004
nope-1004's picture

So where is the inflation?  Ben says it's around 2%.  Is he lying (again)?

 

Fri, 06/21/2013 - 10:58 | 3679132 Uncle Remus
Uncle Remus's picture

Still

Fri, 06/21/2013 - 10:59 | 3679133 Toolshed
Toolshed's picture

Go to the grocery store or the gas station. You will find it there in abundance.

Fri, 06/21/2013 - 11:25 | 3679226 pods
pods's picture

If you include Value Deflation it isn't even in abundance.

More for less!

pods

Fri, 06/21/2013 - 11:56 | 3679391 gmrpeabody
gmrpeabody's picture

So..., what you are saying is..., we can all substitute road kill for beef if we choose.

Cat..., the other white meat.

Fri, 06/21/2013 - 11:01 | 3679138 Singelguy
Singelguy's picture

Everyone knows the CPI is a cooked number. Compare your grocery bill this week to wha it was a year ago. If that does not convince you compare the package size and weight of food products to a year ago. Prices are higher than 2% and / or the package content is less than 2% from a year ago. Stop paying attention to government numbers!

Fri, 06/21/2013 - 11:28 | 3679237 Captain Benny
Captain Benny's picture

And the coffee quality is far worse than 2% of what it used to be.  It tastes like brown shit water nowdays...

Fri, 06/21/2013 - 11:41 | 3679296 Baldrick
Baldrick's picture

Go to sweetmarias.com and buy your own and roast it at home. The bean quality is higher and it is cheaper.

Fri, 06/21/2013 - 11:38 | 3679276 Enceladus
Enceladus's picture

My Stella Artois only has 11.2 fl oz

But I bought some ice cream at Costcos and was shock to see the huge container, so I look to see how much was in the carton. It was a half gallon. I hadn't seen one of those since Clinton was in office.

Fri, 06/21/2013 - 12:57 | 3679603 Herd Redirectio...
Herd Redirection Committee's picture

Bag of chips down to 6 oz from what, 8 oz.

Sugar water now comes in packs of 20 instead of 24. But its the same price as before, so no inflation right? /s

Fri, 06/21/2013 - 11:58 | 3679405 smlbizman
smlbizman's picture

is their a new list of elimination....energy, food, and now health care cause my personal premiums have been soaring for at least ...ever...

Fri, 06/21/2013 - 11:01 | 3679141 El Viejo
El Viejo's picture

And nothing erodes fixed income faster than cutting Interest rates by 60%.

Fri, 06/21/2013 - 12:05 | 3679448 NeedleDickTheBu...
NeedleDickTheBugFucker's picture

Interest rise because there is inflation. Inflation erodes debt.

Not always.  Nominal rates increasing faster than real rates would imply higher inflation expectations.  Recently, we have seen the opposite as real rates have incresaed faster than nominal rates (look at TIPS vs. TLT).  Equity markets, commodities, PMs are getting crushed because of the 70 bps increase in real rates since mid-May (TIPS breakevens down 25 bps over that timeframe).

Fri, 06/21/2013 - 13:39 | 3679784 Kirk2NCC1701
Kirk2NCC1701's picture

No Crystal Ball is perfect, but they are profitable.

p.s. Cognitive dissonance gets junked, even if truthful. Ironic, isn't it?

Fri, 06/21/2013 - 10:44 | 3679070 drivenZ
drivenZ's picture

"That's why all asset classes that depend on cheap, abundant credit are doomed:"

 

if you mean boom and bust then yea...but that doesn't mean the bust is coming this year. we're in a protracted repeat of the early 2000's. Rates are still very low and cheap credit, atleast in housing is being extended to good quality borrowers(so far) 

Fri, 06/21/2013 - 10:49 | 3679093 donsluck
donsluck's picture

Sorry about the -1, but you are mistaken about credit. Cash purchases of a house are much higher then the early 2000s. Loose money is not being lent out, but being "invested" by the banks. Why lend at these rediculous rates?

Fri, 06/21/2013 - 11:05 | 3679142 ebworthen
ebworthen's picture

An FHA loan at 3% down backed by Fannie/Freddie (with taxpayer money) is a repeat of what caused 2008.

That is where we are; yet another unsustainable debt bubble.

"Neofeudal debtocracy."

Fri, 06/21/2013 - 11:19 | 3679209 GMadScientist
GMadScientist's picture

Perhaps we disagree on the creditworthiness of your average REIT, who're the only ones actually buying right now.

Fri, 06/21/2013 - 11:42 | 3679299 Panafrican Funk...
Panafrican Funktron Robot's picture

http://www.finviz.com/quote.ashx?t=REM

Tells you everything you need to know about the state of housing finance.

Fri, 06/21/2013 - 10:45 | 3679074 Quinvarius
Quinvarius's picture

QE was all crony loans to bankers.  It was worse than Mugabee paying off his retired soldiers in Zimbabwe, which started their hyperinflation.  There is a whale out there with 2 trillion dollars.  Guess what?  I don't want dollars.  I don't want to be in this game until the whale unloads. 

Fri, 06/21/2013 - 11:01 | 3679139 swmnguy
swmnguy's picture

Exactly.  Mugabe's mistake was in giving the funny money to his soldiers, who spent it.  The Bernank, having learned from the 1930's and Mugabe, gave the funny money to the banks, on the very condition that they not spend it.  The banks are merely swapping their worthless paper for the funny money, and cycling the funny money itself back through Treasuries.  In theory, at least, it's a closed loop like an air conditioner coolant cycle.  But of course air conditioner coolant loops leak, and then things get...a lot hotter.  So far, The Bernank's cycle hasn't leaked much.  But it has leaked some, and that leakage has flowed into equities.  Which is why if there's even a hint of the influx "tapering," the equities hold their breath until they turn blue.  The whale may unload, but when he does, he poisons the water he has to live in.

Fri, 06/21/2013 - 11:38 | 3679278 Herd Redirectio...
Herd Redirection Committee's picture

Banks now bail-in depositors.

Hence depositors are at greater risk at the moment (compared to the pre-bail-in era).  Hence they will (one way or another) demand to be paid interest on their deposits.

Thats when the reserves that banks are sitting on will have to be lent out.

Fri, 06/21/2013 - 10:46 | 3679078 donsluck
donsluck's picture

The electorate will not allow another broad in-your-face bailout. The only out now is distraction, and the most effective distraction is...porn...I mean war!

Fri, 06/21/2013 - 10:46 | 3679079 BadDog
BadDog's picture

We don't know when it will end because few if any of us here were at Watford U.K. this past week.

Fri, 06/21/2013 - 10:47 | 3679083 Spitzer
Spitzer's picture

Who was the poster dumping on mining stocks the other day ?

He was saying that Pretium was in a remote location and its a joke to buy these stocks.

Get with the program. This is ZIRP. Fundamentals don't matter. Buy some minning stocks. The hot money will eventually flow their way.

I don't care if Pretium is on Mars.

Fri, 06/21/2013 - 11:43 | 3679314 Herd Redirectio...
Herd Redirection Committee's picture

Mining friendly jurisdiction is more important than supposed remoteness.  What is it, 50km from the ocean and Stewart BC?

They have some of the best grades I have seen... Ever.  Probably anyone has seen for 30+ years!

Fri, 06/21/2013 - 12:44 | 3679573 Spitzer
Spitzer's picture

You should see how remote some of these oilsands projetcs are. Its insane.

Fri, 06/21/2013 - 10:47 | 3679084 ThunderingTurd
ThunderingTurd's picture

It would appear that the rising interest rate meme is not good for the big banks...

Apparently that only is good if it is based on growth...

Fri, 06/21/2013 - 10:49 | 3679098 fonzannoon
fonzannoon's picture

as long as banks can mark to fantasy rising rates are fantastic for banks. falling rates on the other hand, are fantastic for banks.

Fri, 06/21/2013 - 11:44 | 3679323 Herd Redirectio...
Herd Redirection Committee's picture

When rising rates means they are earning more interest income, thats fine.

But this is going to mean a return to them having to PAY interest.

Fri, 06/21/2013 - 11:54 | 3679379 Panafrican Funk...
Panafrican Funktron Robot's picture

Indeed, everything will look like the My Little Pony universe, right up until an animated Rob Zombie crashes the party and chainsaws pony heads.

Fri, 06/21/2013 - 10:48 | 3679087 patriphil
patriphil's picture

If housing prices decline again...........then think Big Biz buying more......Rental America...

Fri, 06/21/2013 - 10:48 | 3679089 Clam McCain
Clam McCain's picture

Gold also heading to 1000...wheels have already fallen off

Fri, 06/21/2013 - 10:51 | 3679107 Spitzer
Spitzer's picture

Good luck getting any physical at those prices.

Physical almost dried up at $1350

 

Freegold is coming

http://freegoldobserver.blogspot.ca/2011_09_01_archive.html

Fri, 06/21/2013 - 13:55 | 3679850 Kirk2NCC1701
Kirk2NCC1701's picture

Disagree. Given the latest PM price whack, I visited my local PM shop yesterday.

Had no problem getting PM. Ironically, got some marginally numismatic stuff because ppl were selling it to the shop. Unless they pulled LoP and bought at $300, they are selling at a loss.

Last night I checked several online sites, and availability was not an issue. As a matter of fact, KITCO had more variety than I have seen at $1700.

The PM shop thought that people are more cautious since the last bullion rush of two months ago, lest they "overpay" on a downward spiral.

Unless you're the Fed, JPM or GS you are merely crystal ball gazing where it will all end. But obviously the tipping point will eventually he reached, but I doubt that anyone here knows for sure where that point is.

Fri, 06/21/2013 - 11:10 | 3679144 Quinvarius
Quinvarius's picture

Maybe.

Gold backing of the US monetary base in 1/15/1980 with gold at 800 = 145%

Gold backing of the monetary base today with gold at 1300 = 10.8%

Gold backing of the monetary base in 9/1/1999 with gold at 250 = 11.6%

There are a lot of ways to look at it.  But I am very comfortable taking banker, government, and hedgey gold here.  IMO, they messed up and are trying to cap it way below any possible sustainable level.  It amuses me. 

Fri, 06/21/2013 - 11:27 | 3679234 fuu
fuu's picture

Damn I hope so. I would prefer $100 or maybe $10, but $1000 works for now.

Fri, 06/21/2013 - 10:49 | 3679095 moneybots
moneybots's picture

"That's why all asset classes that depend on cheap, abundant credit are doomed: once yields/rates rise, the valuations of those assets implode. And once valuations implode, there's not enough collateral left to support the loans used buy all those cheap-credit-inflated assets. So the financial system also implodes."

 

That sounds rather DEFLATIONARY.

Fri, 06/21/2013 - 10:51 | 3679105 diogeneslaertius
diogeneslaertius's picture

UKIPWEBMASTER TWEETED THIS SHIT

 

game, set, and match: ZeroHedge

Fri, 06/21/2013 - 10:58 | 3679131 ebworthen
ebworthen's picture

Excellent stuff Charles.

"...cheap, abundant credit...which props up all the cartels, rentier arrangements, fiefdoms and armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo."

Bravo.

Fri, 06/21/2013 - 11:01 | 3679140 firstdivision
firstdivision's picture

With rising rates, you'll see demand come back, but it's future demand getting pulled in.  You'll see home prices rise in the short-term, but fall in the long-term as demand falls off a cliff.

Fri, 06/21/2013 - 11:02 | 3679146 TooBearish
TooBearish's picture

Callin BS on lame duck BB.. QE will b tempered NOT as any initative of BB will be out done the other way 2X by new FED head LARRY SUMMERS in 7 months

Fri, 06/21/2013 - 11:06 | 3679159 CHX
CHX's picture

Fiat (money) IS easy debt, so what will (and has in the past) stand the test of time? Hyperinflation or deflationary collapse lead to very similar economic outcomes. Trust in the fiat ponzi is what keeps things together, for now. Prepare accordingly.

Fri, 06/21/2013 - 11:07 | 3679161 Snoopy the Economist
Snoopy the Economist's picture

This is stupid - if interest rates increase the biggest worry is the gubmint default because the interest payment on $17T (currently $500B/yr at 2.9% interest) could go well over $1T/yr and is in no way feasible.

Fri, 06/21/2013 - 11:12 | 3679184 the not so migh...
the not so mighty maximiza's picture

yeap, biggest debt holders have the biggest worries, .gov i am looking at you

Fri, 06/21/2013 - 11:22 | 3679211 Kinskian
Kinskian's picture

If you have any income and/or own anything that can be taxed, you'd better worry too.

Fri, 06/21/2013 - 13:05 | 3679623 the not so migh...
the not so mighty maximiza's picture

they can tax me 100% and they will still go bankrupt in front of my eyes.

Fri, 06/21/2013 - 11:13 | 3679188 BlackSunshine
BlackSunshine's picture

I don't get it, we've been following the Fed's actions for years now, if the tapering causes the economy to slow down, they will resume QE Infinitum. This game can go on for 30+ years. Look at Japan.

Fri, 06/21/2013 - 11:21 | 3679212 GMadScientist
GMadScientist's picture

No, YOU look at Japan.

Wake the fuck up.

Fri, 06/21/2013 - 13:03 | 3679219 evernewecon
evernewecon's picture

 

 

 

The mortgage bubble was brushed under the rug

by QE, but the bugus value had to run somewhere.


 

For every self important banker who was left holding

overvalued assets there was a seller of the

bubble up until 2008.  The latter of course has suffered

a policy of hand it over and has also been compelled

to underwrite every day another way of taxpayer assisted

loss sharing.  


 

All savers’ incomes have existed at sufferance to free

reserves rained on the banks, and all the privatize

retirement types amazingly ignore how everyone’s

retired parents’ retirement nest eggs have been

ripped off for the same purpose.

 

The banks themselves declined the following

 

http://www.bloomberg.com/news/2012-07-09/dealers-decline-bernanke-twist-bids.html 

 

because they expected the events we’re seeing presently.

 

Undoubtedly they’ve been shorting the bond market.

 

 

In soccer, the ball handler can wait for the defender to

flinch, and then the handler can simply kick the other way.

Defenders can implicitly understand negotiating and

wait for the handler to make the first move.


But what if the handler can know in advance what the

defender will be doing?

 

Thus spoke the Liquidity Trap.

http://www.youtube.com/watch?v=Y9QxaJLt7EA

 

 

Another Way To Look At It Is


 

This Is All About Who Gets

Off The Sinking Ship And Who

Climbs Aboard Value.


 

http://www.youtube.com/watch?v=zCy5WQ9S4c0 

 

 

 

Then Comes The Municipal

Take-It-Or-Leave-Its


 

http://truth-out.org/news/item/8016-wall-street-confidence-trick-the-interest-rate-swaps-that-are-bankrupting-local-governments 


 

And Privatizations


 

http://www.nytimes.com/2012/12/06/world/europe/oligarchs-play-a-role-in-greeces-economic-troubles.html?pagewanted=all&_r=3& 


 

http://goo.gl/jB9is 


 

One Shouldn't Be A Turkey.

http://henryckliu.com/page117.html


 

The Metaphors As To The Titanic I Think Are

Appropriate.   Our Habitat Is Also A Sinking Ship.

As Our Demagogues Need Somewhere To Live

Also, One Of Two Things Is Operable.


 

We Need To Shake Off The Corruption.

We A Species Unable To Escape Sell-Out’ism

Long Enough To Survive Undemocratically

 

Self-Consumptive Policy.


 

 

 

Fri, 06/21/2013 - 11:25 | 3679222 q99x2
q99x2's picture

Freddie's dead.

Fri, 06/21/2013 - 11:34 | 3679263 taketheredpill
taketheredpill's picture

"Once you get +5% rates on Cash"?

Note that Cash and Bonds are teo different things.  Fed will maintain ZIRP which means bank accounts will still pay ZERO.  Bonds offer less risk than equities and flight to safety + falling inflation will work to restrict rise in Govie yields...at least until Ben's next experiment, maybe destroy the USD if it keeps ramping up.  Then the markets will look like the firefight in "Platoon" when the Captain orders Napalm on his own position.  Nice.

In the meantime, Govie curve should keep flattening.  Mortgage rates can still widen out as banks re-price risk. 

 

Anybody run 5-year charts on HYG and LQD.  Yikes!

Fri, 06/21/2013 - 11:41 | 3679294 Judge Crater
Judge Crater's picture

According to historian Theodor Mommsen, the Roman Empire prospered when their "prime rate" was 6%.  Until the oil shock of 1973, when the barrel price of oil skyrocketed, the US economy prospered having a prime rate of under 6%.  When Volcker took over as head of the Federal Reserve Bank in 1979, he targeted money supply, restricting the amount of money banks had available to lend.  The interest rates on loans spiked up as the prime rate topped out at 21%, Jimmy Carter lost his Presidential re-election attempt and the U.S. economy crashed.  The situation now is vastly different from 1979 because of the 600 to 700 trillion dollars in derivatives propping up the financial markets, derivatives backed by either overvalued assets or by algorithms.  

Whoever takes over the Fed, there really is no solution to the problem of what to do with paying off derivatives.  Keeping the federal funds rate at near zero is a stopgap measure that allows the Fed to keep the stock markets and money center banks from collapsing by buying up derivative-based debt on credit. The only real solution is to devalue by 80% the derivatives out there: the CDOs, the MBSs, the SIVs and the like.   But how do you devalue a synthetic CDO when you cannot even locate the assets behindf this CDO to determine the real value of the derivative?  You can't.  

So all Bernanke can do is borrow trillions of dollars and hope the world economy starts booming, generating enough real wealth to increase tax revenues to pay off government debts.  That ain't happening anytime soon.  Meanwhile, governments here in the USA and in western Europe are looking the other way as big banks and financial giants like Goldman Sachs are looting the western world, stealing middle class citizens' pensions, government assets and citizens' sovereign rights, all for the insiders to make out like bandits before things get even worse.

Fri, 06/21/2013 - 12:28 | 3679508 RunningMan
RunningMan's picture

Sounds right, Judge. The borrowed money by the Fed is making the extraction of wealth by the giants even easier.

Fri, 06/21/2013 - 12:39 | 3679550 Seeking Aphids
Seeking Aphids's picture

Very true JC....I would really like to see an article with a ZH perspective on the topic of derivatives and their relation to the banking sector and governments. This is the elephant in the room. My view is that this situation is entirely untenable and unresolvable as the counter parties to derivatives are the very assets that people own and rely on for future income. What can be done? Massive write-off of debt worldwide (haircut...think mohawk).  What will probably happen? A financial crash that will reduce 2008 to insignificance. When? No idea. What to do? Pay off debt and lower your standard of living expectations. LIve near sources of cheap and abundant food. Travel and have a good time now if you have no debt and good savings. Buy gold?? (Confiscation??)

Fri, 06/21/2013 - 13:02 | 3679607 Herd Redirectio...
Herd Redirection Committee's picture

Jubilee.  The Great Debt Restructuring. 

Fri, 06/21/2013 - 11:57 | 3679399 devo
devo's picture

Doomed and overpriced, a bad combination.

Fri, 06/21/2013 - 12:24 | 3679496 Seeking Aphids
Seeking Aphids's picture

We should be in the midst of the Great Rebalancing...the process whereby there is a balancing out of trade deficits and standards of living between the West and the ROW. This process has been hijacked by the multinationals who are raking in massive profits while paying little or no taxes....to the tremendous detriment of people around the world. The process is still happening but is much more painful for all than it needs to be thanks to multinationals...governments are borrowing to pay for social programs, etc. which has a hugely negative impact on future growth and stability while the multinationals continue to use tax havens to avoid paying their share. The G8 is supposed to be 'looking into' this problem but I doubt anything meaningful will come of it.......too many politicians are bought and sold by the same people they are supposed to be overseeing. The squabbling in congress over the deficit is a pathetic sideshow compared to the trillions that are being stolen from people around the world by the multinationals........if these corporations were to pay even half of what they are supposed to pay in taxes, there would be no deficit and the debt of the US and most countries would drop dramatically....the whole Fed lending from Paul to pay Peter game could end and interest rates/inflation would return to normal levels.

Fri, 06/21/2013 - 12:31 | 3679506 Debugas
Debugas's picture

how about - every single asset was inflated with cheap credit including "safe heaven" assets

there is simply no place to hide

Fri, 06/21/2013 - 12:41 | 3679556 geewhiz190
geewhiz190's picture

partly true. there are numerous corporations that have zero debt and high cash balances that will be unaffected by the rate rise.                               given the lower chart of velocity i could never understand the touting of gold as a good idea.  just couldn't make sense of what the attraction was.  in any event, the washout may be nearing an end.  some of the miners are beginning to look worthwhile.  ZH's constant gold touting has probalbly hurt a lot people financially.

Fri, 06/21/2013 - 13:02 | 3679612 Herd Redirectio...
Herd Redirection Committee's picture

The USD is the biggest bubble in the world.  Gold is the insurance policy against that.

Fri, 06/21/2013 - 13:14 | 3679672 post turtle saver
post turtle saver's picture

If I don't have any debt, why should I care?

Fri, 06/21/2013 - 13:38 | 3679775 James
James's picture

geewhiz190 said - ZH's constant gold touting has probalbly hurt a lot people financially.

 

ZeroHedge said in disclaimer - Zero Hedge is a financial news and information site, not an investment advisor.  Making investment decisions based on information published on Zero Hedge, or any internet site for that matter, is more than unwise, it is folly.

 

James says - If one chooses to take anybodies word regarding their investment portfolio and not doing their own due diligence on any investment vehicle they have no one to blame but the person in the mirror and frankly deserve to have their financial ass handed to them. Maybe then they'll learn. Myself I recomend everybody go long FaceBook.

Fri, 06/21/2013 - 14:57 | 3680130 alfbell
alfbell's picture

 

 

Gold is just as much at risk as stocks or bonds are (gold and silver may not be the big SAVE that many goldbugs think it wii be). We've got cronyism, fascism, totalitarianism (or whatever you want to call it) slowly settling upon the developed countries. Insurmountable debt will tear everything to shreds. No one can predict what governments will do. Governments are big, corrupt, stupid and self-interested. They are inverted in their purpose (and their primary purpose is to retain power, at the expense of everything, including the citizenry). When they get desperate it is tantamount to your being in a windowless and doorless room with a wounded tiger (you will most likely wind up as collateral damage). Everyone has to determine the following for themselves... what is wealth for me? what will sustain me? what is true preparation? what will happen in the area that I live? do I need to move (and if so, where)? how can I survive the all the possible end scenarios that could manifest as a result of our FUBAR systems? etc?

Fri, 06/21/2013 - 20:00 | 3680992 evernewecon
evernewecon's picture

 

I wanted to add the link to ZH's bond rout column but 

couldn't find my earlier comment.   Here's the C-P w/ the edit.

 

The mortgage bubble was brushed under the rug

by QE, but the bugus value had to run somewhere.

 

For every self important banker who was left holding

overvalued assets there was a seller of the

bubble up until 2008.  The latter of course has suffered

a policy of hand it over and has also been compelled

to underwrite every day another way of taxpayer assisted

loss sharing.  

 

All savers’ incomes have existed at sufferance to free

reserves rained on the banks, and all the privatize

retirement types amazingly ignore how everyone’s

retired parents’ retirement nest eggs have been

ripped off for the same purpose.

 

The banks themselves declined the following

 

http://www.bloomberg.com/news/2012-07-09/dealers-decline-bernanke-twist-bids.html 

 

because they expected the events we’re seeing presently.

 

Undoubtedly they’ve been shorting the bond market.

 

In soccer, the ball handler can wait for the defender to

flinch, and then the handler can simply kick the other way.

Defenders can implicitly understand negotiating and

wait for the handler to make the first move.

 

But what if the handler can know in advance what the

defender will be doing?

 

Thus spoke the Liquidity Trap.

 

http://www.youtube.com/watch?v=Y9QxaJLt7EA 

 
 

Another Way To Look At It Is

 

This Is All About Who Gets

Off The Sinking Ship And Who

Climbs Aboard Value.

 

http://www.youtube.com/watch?v=zCy5WQ9S4c0 

 
 
 

To Properly Complete The

Analogy, Though, The

Passengers Who Didn't Make

It Onto The Lifeboats

Would've Had To Have Bought

The Rescued Passengers'

http://www.zerohedge.com/news/2013-06-21/treasuries-worst-week-50-years-stocks-worst-week-2013 

Worthless Assets Before

Anyone Saw The Iceberg

Coming.

 
 

To Fully Understand The

Continuing Economic Saga, To

The Extent The Drowning

Passengers' Overpaid For Those

Assets, With That Measure A

Moving Target (The Percentage

Of Overpayment Likely Growing,)

That's An Inflation Pocket That

Will Flow Somewhere Else.

Before One Can Suddenly Decide

They Can See The Future, Recognize

This Is A New Risk Set-Point That

In Itself Was A Point For Forecasting

Last Week, Last Month, And So On.

 

Then Comes The Municipal

Take-It-Or-Leave-Its

 

http://truth-out.org/news/item/8016-wall-street-confidence-trick-the-interest-rate-swaps-that-are-bankrupting-local-governments

 

And Privatizations

 

http://www.nytimes.com/2012/12/06/world/europe/oligarchs-play-a-role-in-greeces-economic-troubles.html?pagewanted=all&_r=3&

 

http://goo.gl/jB9is

 

One Shouldn't Be A Turkey.

http://henryckliu.com/page117.html

The Metaphors As To The Titanic I Think Are

Appropriate.   Our Habitat Is Also A Sinking Ship.

As Our Demagogues Need Somewhere To Live

Also, One Of Two Things Is Operable.

 

We Need To Shake Off The Corruption.

We A Species Unable To Escape Sell-Out’ism

Long Enough To Survive Undemocratically

Self-Consumptive Policy.

Do NOT follow this link or you will be banned from the site!