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Deja Vu All Over Again

Tyler Durden's picture




 

Submitted by Jim Quinn via The Burning Platform blog,

Janet Yellen will increase interest rates for the first time in nine years on Wednesday. She isn’t raising them because the economy is strengthening. The economy just happens to be weakening rapidly, as global recession takes hold. The stock market is 3% lower than it was in December 2014, and has basically done nothing since the end of QE3. Wall Street is throwing a hissy fit to try and stop Janet from boosting rates by an inconsequential .25%. Janet would prefer not to raise rates, but the credibility and reputation of her bubble blowing machine is at stake. The Fed has enriched their Wall Street benefactors over the last six years, while destroying the real economy and the middle class.

The quarter point increase will be reversed in short order as soon as we experience market collapse part two. It will be followed with negative interest rates and QE4, as these academics have only one play in their playbook – print money. They created the last financial crisis and have set the stage for the next – even bigger collapse. John Hussman explains how their zero interest rate policy has driven speculators into junk bonds as the only place to get any yield.

Over the past several years, yield-seeking investors, starved for any “pickup” in yield over Treasury securities, have piled into the junk debt and leveraged loan markets. Just as equity valuations have been driven to the second most extreme point in history (and the single most extreme point in history for the median stock, where valuations are well-beyond 2000 levels), risk premiums on speculative debt were compressed to razor-thin levels. By 2014, the spread between junk bond yields and Treasury yields had fallen to less than 2.4%. Since then, years of expected “risk-premiums” have been erased by capital losses, and defaults haven’t even spiked yet (they do so with a lag).

Years of excessive risk taking, spurred by the reckless Fed policy convinced Wall Street to issue billions in junk bonds, just as ridiculously low rates from 2001 through 2005 spurred billions of subprime mortgage issuance. Wall Street has no care about clients, investors, or the impact on the economy. They care about fee generation and dumping their toxic sludge on someone else. The junk bond market is imploding and any muppet who has been lured in during the last two years is getting slaughtered.

The entire shale scam was funded with easy money and junk bonds. The dozens of companies who issued billions in junk bonds weren’t profitable at $80 oil. They are plunging towards bankruptcy at $36 oil. The amount of mal-investment created by the Federal Reserve over the last six years is almost incomprehensible. The tremors in the junk bond market portend another Lehman moment in the near future.

From an economic standpoint, the unfortunate fact is that the proceeds from aggressive issuance of junk debt and leveraged loans in the past few years were channeled into speculation. Excess capacity in energy production was expanded at the cyclical peak in oil prices, and heavy stock buybacks were executed at obscene equity valuations. The end result will be unintended wealth transfers and deadweight losses for the economy. Since the late-1990’s, the Federal Reserve has actively encouraged the channeling of trillions of dollars of savings into speculation. Recurring cycles of malinvestment and crisis have progressively weakened the resilience and long-term growth prospects of the U.S. economy.

The coming collapse will be three pronged as stocks, bonds, and real estate are all simultaneously overvalued. Junk bonds are the canary in a coalmine. High end real estate in NYC has topped out. New and existing homes sales growth has stalled out. Retailers desperately slash prices to maintain sales, while destroying their profits. Corporate profits are falling. The stock market is teetering on the edge. If you can afford to lose 50% of your retirement savings, now is the time to buy some Facebook, Netflix, Google, or Amazon on margin.

Given the valuation extremes we presently observe in the equity market (see Rarefied Air: Valuations and Subsequent Market Returns), our view is that spiking yields in the junk debt market are a precursor of significant losses in stocks, as we’ve observed in other market cycles across history.

At current valuations, the notion that “There Is No Alternative” (TINA) to zero-interest cash is profoundly incorrect. The only thing that equities offer here is to promise wider extremes of panic, despair, excitement, and hope over the coming 10-12 years, on the way to overall returns no better than safe, liquid cash equivalents are likely to achieve.

Over the last two decades the Fed’s interventionism has created artificial booms and real busts. Their dreadful mistakes are “fixed” by currency debasement, lower interest rates, and money printing – creating even worse mistakes. They have successfully gutted the American economy and left a hollowed out shell.

Moreover, as we should have learned from the global financial crisis, when the Fed holds interest rates down for so long that investors begin reaching for yield by speculating in the financial markets and making low-quality loans, the entire financial system becomes dangerously prone to future crises. If the Fed’s mandate is really to support long-run employment and price stability, the first priority of Congress should be to rein in this cycle of activist Fed intervention; to end the Fed’s ability to promote yield-seeking speculation and malinvestment that only produces inevitable crises and weakens long-run U.S. economic prospects.

Bernanke is no hero. He did not save us. He saved his cronies on Wall Street and their captured politician lackeys in Washington DC. The unholy alliance between central bankers, corporate America, and corrupt politicians resulted in Glass Steagall being repealed and allowing Wall Street to run roughshod over our economic system, reaping riches during the good times and heaping the inevitable losses onto the backs of taxpayers. That’s the new American Dream.

Some would argue that the Federal Reserve “saved” us from the global financial crisis. I couldn’t disagree more. My view is that the financial crisis was caused because the Fed overly depressed interest rates in the early 2000’s, encouraging investors to reach for yield in mortgage securities. In response, poorly regulated financial institutions, with banks free from the constraints of Glass Steagall, and other institutions having inadequate capital requirements, created a huge mountain of new, low-grade mortgages in the frenzy to create more “product.” The easy lending created a housing bubble, but someone had to hold the mortgages when they went belly-up, and those holders were banks, insurance companies, hedge funds, and individuals. As the mortgages went into foreclosure, banks had to mark the value of those mortgages to market value on their books, to the point where the value of their assets was less than the value of their liabilities: insolvency.

The liquidation of insolvent criminal Wall Street banks would have set the country back on the path to legitimate recovery. Instead, the ruling class chose accounting fraud, QE to infinity, and screwing senior citizens with 0% interest rates.

In hindsight, the financial crisis actually ended – precisely – in March 2009. How? The Financial Accounting Standards Board changed rule FAS 157 and overturned the mark-to-market requirement, instead allowing financial institutions “significant judgment” in the way they valued their assets: often called mark-to-model (or as some of us call it, mark-to-unicorn).

John Hussman warned those who chose to listen in 2000 and 2007 about the impending collapses. He has been warning those who choose to listen for months again. This market has gone nowhere in the last 13 months. It’s about to go somewhere, and that is DOWN. Remember 2000 and 2007. Enjoy the trip – deja vu all over again.

In the absence of clear improvement in market internals – and last week was categorically opposite to that – I view the stock market as being in the late-phase of an extremely overvalued top formation that will likely be followed by profound losses over the completion of this market cycle, and the U.S. economy as being on the cusp of a new recession.

Read Hussman’s Weekly Letter

 

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Mon, 12/14/2015 - 13:05 | 6921949 Looney
Looney's picture

The entire shale scam was funded with easy money and junk bonds. The dozens of companies who issued billions in junk bonds weren’t profitable at $80 oil. They are plunging towards bankruptcy at $36 oil.

If interest rates can go negative, why can’t oil price go negative as well?  ;-)

Looney

Mon, 12/14/2015 - 13:08 | 6921963 Hitlery_4_Dictator
Hitlery_4_Dictator's picture

Looks like that rate hike is on, PPT ensuring everythign looks great for Wednesday. 

Mon, 12/14/2015 - 13:43 | 6922103 UndergroundPost
UndergroundPost's picture

And this one WILL be of Biblical proportions...

https://www.youtube.com/watch?v=O3ZOKDmorj0

Mon, 12/14/2015 - 14:23 | 6922323 SoilMyselfRotten
SoilMyselfRotten's picture

The next move down is lookin like a doozey

Mon, 12/14/2015 - 13:13 | 6921979 KnuckleDragger-X
KnuckleDragger-X's picture

"May you live in interesting times".......

Mon, 12/14/2015 - 16:07 | 6922817 nuubee
nuubee's picture

Energy can't go negative because energy is where the laws of physics interefere with the laws of Keynes. In order for energy prices to go negative, you would have to change the laws of thermodynamics, which I don't think most Keynesians are prepared to do.

 

Sadly, the reason Austrian economics actually works has little to do with the cleverness of economists... it has to do with the fact that it does not attempt to deny the physical reality of this basic economic and physical input to all economies... energy.

Mon, 12/14/2015 - 13:07 | 6921958 wmbz
wmbz's picture

Remain calm...Obozo the clown is visting the Hexagon today, reveiwing security agaisnt ISIL.

He's got our backs!

Now climb back under your desk, suck your thumb, and assume the fetal position!

Mon, 12/14/2015 - 13:07 | 6921959 Cognitive Dissonance
Cognitive Dissonance's picture

"The liquidation of insolvent criminal Wall Street banks would have set the country back on the path to legitimate recovery. Instead, the ruling class chose accounting fraud, QE to infinity, and screwing senior citizens with 0% interest rates."

Expect even more of the same......only worse and orders of magnitude more manic. The lunitics running the asylum will not let go of power and must be removed.

Mon, 12/14/2015 - 13:22 | 6922003 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Don't forget your security blanket & Binky Bear.

Mon, 12/14/2015 - 13:09 | 6921961 medium giraffe
medium giraffe's picture

"The junk bond market is imploding and any muppet who has been lured in during the last two years is getting slaughtered."

Would that include all of the Euro banks that were forced to hold Euro junk bonds because it became mandatory?

What could possibly go wrong? :D

Mon, 12/14/2015 - 13:16 | 6921988 LawsofPhysics
LawsofPhysics's picture

Did you buy MYIRA yet?  Hurry up, before it's mandatory!!!

Mon, 12/14/2015 - 13:20 | 6922000 medium giraffe
medium giraffe's picture

Lol. Fortunately the only IRA I ever had to worry about were the pissed off Irish fellas with their home made fertilizer bombs.  MyIRA sounds much worse though.

Mon, 12/14/2015 - 13:12 | 6921976 The Pope
The Pope's picture

Quinn blames it all on ragheads with boxcutters.

Mon, 12/14/2015 - 13:15 | 6921983 Make_Mine_A_Double
Make_Mine_A_Double's picture

And the DOW is marginally green on an absolute torrent of shit.

I wonder how many trillions the Fraud 'spent' this morning to prop it up.

 

Mon, 12/14/2015 - 14:50 | 6922475 Dr. Spin
Dr. Spin's picture

Meanwhile PMs continue their inexorable slide...

Spoctor Din

Mon, 12/14/2015 - 15:00 | 6922525 stocktivity
stocktivity's picture

2 pm - back to green. It probably was oversold and due for a bounce. What I find odd today is this waving pattern between green and red. Usually the oversold bounce has held up these past 9 years. These are scary times and I wouldn't be surprised to see a mini crash soon.

Mon, 12/14/2015 - 13:19 | 6921998 moonmac
moonmac's picture

I've yet to see a junkie not relapse. QE4 is on the way!

Mon, 12/14/2015 - 13:29 | 6922036 RiverRoad
RiverRoad's picture

RESET.

Mon, 12/14/2015 - 13:34 | 6922059 two hoots
two hoots's picture

My guess:  we will see at least three  .25 rate increases then a pause for market catch-up and further direction.  Markets remain volitale as debt will continue to sort itself out over the next couple of years.  Fed must get a handle on low rates which led to this debt bubble, since it is obvious, even they must now acknowledge it.

Mon, 12/14/2015 - 13:40 | 6922086 db51
db51's picture

Shitters full Clark.

Mon, 12/14/2015 - 13:43 | 6922105 GhostOfDiogenes
GhostOfDiogenes's picture

Wow. This is also vujaday!

So newsworthy. So.....historical.

Mon, 12/14/2015 - 13:55 | 6922150 Sudden Debt
Sudden Debt's picture

The DOW isn't dropping. That's weird...

 

Mon, 12/14/2015 - 14:02 | 6922166 cougar_w
cougar_w's picture

"They have successfully gutted the American economy and left a hollowed out shell."

I want to clear something up here. What the oligarchs have been doing is the wealth equivalent of strip mining.

The wealth of this nation -- that accumulated over 200 years -- was the product of a lot of individuals working very hard. Most of them, immigrants from places like Ireland and Germany. All over the world really. They brought cultural diversity, fresh ideas, and a desire to change their own fortunes for the better. This isn't even a myth, just a fact, and the entire world knows that about America. For a long time "America" meant those things, coupled with the freedom to take a risk on yourself.

About 1950, that started to change. Between the end of WW2 and the Nixon years, people still thought you could make a difference for yourself. After Nixon, not nearly so much. And starting around 1995 it became abundantly clear that the old American ideal was dead. Dead and composted.

About then I clearly recall the rise of The Deal.

It's been all dealing since then. And the dealings have been about extracting all the value that was ever built up by actual innovation and hard work. When industrialists strip mine a coal seam they are extracting 300 million years of accumulated energy, nearly for free. When the dealers came along and started the LBO and risk-free and Fed-backstopped value extraction orgy, they were doing the same thing. 200 years of hard work, real personal risk, personal commitment and innovation was strip mined by cynical MBAs for quarterly gains. When some venture was hollowed out, they moved on.

Very little, verging on nothing, has been built in America for 30 years. The only value in motion today is being strip mined -- really, it's economic rape -- and pocketed by individuals who have never had a unique thought in their entire lives, never worked a day, never built anything from scratch, never worked with real people on real enterprises directed at real products and services resulting in the creation of real value. Just deals and deals and more deals clawing their way through the flesh of the American dream, violating and devouring everywhere they go, leaving a desiccated husk.

I despise them. All of them. They are vampires and worse -- they are cannibals. I very much look forward to seeing them devoured in turn.

Mon, 12/14/2015 - 18:57 | 6923431 zaphire999
zaphire999's picture

good post

 

the new post western world

Mon, 12/14/2015 - 14:24 | 6922336 madcows
madcows's picture

Don't forget the dollar.  It's overvalued, too.

Mon, 12/14/2015 - 15:24 | 6922631 peu peu moxi
peu peu moxi's picture

Deja VieuX All Over Again WITH COKE PLS.

Tue, 12/15/2015 - 00:23 | 6924593 red1chief
red1chief's picture

My broker won't let me margin my IRA, what can I do?

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