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How The Rout Will Decide The Route
From Mark Grant, author of Out of the Box and Onto Wall Street
The Rout Will Decide The Route
“The ride is the thing; to sit out is to opt-out of the hand that you have been dealt. You were handed the cards at birth, you get to play them as you choose. Use all of the skill that you can master in their play and never, ever stop the shuffle!”
-The Wizard
This month marks my thirty-ninth year on Wall Street. What a ride it has been. Inflation and Deflation, a whole host of political shenanigans, fighting it out in the board rooms of four investment banks, hiring and firing people, playing Liar’s Poker in the trading room at Salomon Brothers, watching the stars of various luminaries rise and fall, helping to create the present day structure for corporate bonds tied to Inflation, a constant stream of re-inventions, almost twelve years of writing “Out of the Box” and still here; playing the Great Game. I have always said that experience is not replaceable by innate intelligence. There is no way to excel at the Great Game except by playing it. Age gives you the opportunity to acquire some wisdom as you head down the path and, if you do things right, you are better armed than the younger combatants.
So here I stand at three decades and nine and I will share with you what I have learned in the hopes that you may benefit from my musing. For the last four years the markets have been living off the mother’s milk of the Fed. The spigot has been open, money has been pouring out and equities have been buoyed by the flow while yields have come down because of it. The last Fed minutes marked a significant day in the market place that is not well understood and that is the day that the spigot was shut off. Now if there is great adversity it could be opened again but for now; no more Monetary Easing, no more Quantitative Easing and this is a game changing event; make no mistake about it.
Now there are those that will go on playing assuming that not much has happened and I will tell you that this is a losing hand. Many people in the markets will assume that the equity markets and the bond markets will just keep rolling along but the easy glide that had been facilitated by the flow of money is no longer there and so change is surely afoot. Within fifteen minutes after the Fed released their minutes I was on-line with commentary suggesting you take profits, raise cash and re-think just how the Game was going to be played. Equities are now going to turn down, long experience teaches you something and while I cannot predict how far down they will go; that is going to be the new heading. Also as a result of the lack of any more new money, and if there is some sort of normalcy, yields are going to rise especially in longer maturities and preparation is now the key to protecting what profits the Fed has helped you achieve. The days of compression are over and spreads are also going to begin to widen. Then Inflation is likely coming, the great killer of portfolios, and the adept will begin to switch strategies now. Injections of liquidity drive markets up and the end of liquidity injections drive markets down and do not be fooled into thinking otherwise.
A Projection based upon Normalcy
Now the current 10 year Treasury yields 2.18% and the average for the 10 year over the last ten years is approximately 3.86% so if the Treasury market goes back to its average condition then there will be a thirteen point loss from our present position. If the statistical deviation from where we are currently were to kick-in because of Inflation or politics or the forthcoming drop in monetary supply then the 10 year would yield 5.54% and the resultant loss from today’s price would be around twenty-five points. You wince, I wince but there you are. Now let us consider a shorter time horizon and use the date of the Lehman bankruptcy as the starting point which was 9/15/08 and when the Fed began injecting liquidity. The average yield for the ten year during that period of time was 3.00% so that a return to that average would result in a 7 point decline and if the statistical deviation were to come to pass then the loss would be about 13.25 points.
Then just for the fun of it let’s do the same exercise for equities. The Dow Jones average price over the last ten years was 10,714. This would mean that the Dow Jones would drop 18% if we returned to the ten year norm and a 33% loss if we use the derivation. Then using the Lehman date as the kick-off the average price for the Dow is 10,560 giving us a 19% loss or a 35% loss with the derivation.
A Projection based upon European Disruptions
The first scenario is built upon two sets of normal reactions when the Fed shuts off monetary easing. This projection is based upon the very serious fiscal and monetary problems in Europe causing quite different reactions. With our central bank finishing its easing and the ECB continuing in the pumping out of newly printed money then things will go in a quite different fashion. Treasuries will rise in price while risk assets will widen to Treasuries and the divergence between European equities and bonds and American equities and bonds will be quite pronounced. Equities will go down in both cases in America but the drop will be horrifying in Europe and none too pleasant in the United States as the Dollar will soar versus the Euro as America’s safe haven position takes on great credence. There will be a return to very wide spreads for Corporates and other credit risk bonds in the U.S. and Treasuries could head to all-time low yields if the Eurozone begins to break-up.
Liquidity never solves issues of solvency and the time that it buys is generally of a relatively short duration. After the $1.3 trillion loan by the ECB to the European banks which helped drive up the prices for European sovereigns what do we now find as the liquidity ebbs? Yesterday’s Spanish auction was abysmal and the French auction today did not go too well with rising yields and less demand. The austerity measures are driving Europe into a worsening recession and the financial positions of Spain and Italy are deteriorating even as new measures are put into place. In fact there are only two ways out of the European mess which are growth, not happening, and Inflation which may be the ultimate strategy employed by the EU and the ECB if the construct holds to the point of changing strategies which is surely no outlier event.
Please note, it is critical to note, that these are NOT opposing scenarios. The Dollar appreciates in either one, equities decline however it goes, risk assets widen to Treasuries in both cases and it is only the question of the yield on U.S. Treasuries that remains in doubt which is totally dependent upon how bad the situation becomes in Europe. On the Continent I foresee no way out; much lower equity prices, much higher yields for credit assets and sovereigns as succored by both the solvency issues and more liquidity which will only weaken the entire structure with the ECB already at a 4 trillion dollar debt and the quite real possibilities of Italy and/or Spain falling into the deep abyss of economic or political collapse.
The rout is not in question; only the severity of it.
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Let the rout begin!!!
Jump immediately to triple warp speed. Better yet, straight to Ludicrous Speed on the way to Plaid.
Don't bother fighting city hall on this. On Sunday they'll do an announcement of printing more money.
http://confoundedinterest.files.wordpress.com/2012/04/lesko.jpg
What are all these quotes from "The Wizard"? Is there a fantasy book I haven't read? I doubt it.
Would Garmin help me pick the best rout?
no..but Gatman may
"The last Fed minutes marked a significant day in the market place that is not well understood and that is the day that the spigot was shut off. Now if there is great adversity it could be opened again but for now; no more Monetary Easing, no more Quantitative Easing and this is a game changing event; make no mistake about it. "
I laugh in this guys general direction. Apparently a sucker is still born every minute.
Tyler,
why waste all your energy claiming the world have to end as it is. Evreybody knows what the problem is.
Liquidity is not enough to heal the balance sheet. Time is what is needed. But this is too much to ask to the Zero hedge's Ayatolla
They want the problem solve by burning the farmhouse today. And also, Stop barking every time the stock market or Euro turn negativr
as if the Light of Revelation came upon the non believers. A little restain would certainly help to inprove your credibility.
Spell Check would improve your credibility.
As would addressing the actual author.
Details, details.
I see his point though. It does get mundane waiting for things to slipslide away. Like a slow moving parade.
Which means he should eat his popcorn quietly and stop trying to fuck with the landlord.
You've stained enough for all of us.
You forgot to mention that you think Blake Shelton is cute. You can't mention farmhouses and not pass on your gossip about the Voice.
ROTFLMAO!! Tyler doesn't need any credibility... he's got a top name on Whore Street. You can not even access ZH on most firm's servers but what makes it so delicious is that because they make ZH the forbidden fruit they go home and read all they can... and become astounded when they see the light! It is so bright they need to adjust slowly!
Remember ZH does NOT play well with the ponzi scheme of Whore Street's elite and thus they hate Tyler's guts...
But going back to what you were saying about "time"... LMAO!! You are partially correct because that was part of their plan (there is a technical term for what they are doing which basically uses smoke and mirrors to BUY enough time so they can get things back to normal and hope by that time everyone will have forgotten about the problem...)
Anyways... their time is almost up. They initially calculated that everything would be healed by end of 2011 but as you can see the whole thing is going off the cliff in an uncontrolled fiat inflationary ponzi!!!
So time (by which you mean inflation, right?) is going to repay unrepayable debts? ... Perhaps you can explain why the JAPANESE PUBLIC BALANCE SHEET keeps getting astronomically worse ... ... after 23 years of printing and stimulating, devaluing and deficit-bridging, to avoid the still pending great depression there? ... I'll give you a hint, if you take away demand, balance sheets expand.
While English obviously isn't your first language (you get a pass, and mad props for even trying to communicate in something other than your mother tongue), you are missing (or ignoring) some very large issues.
I strongly suggest you review the last six month's worth of posts regarding debt and derivatives. 'Cause if you don't, and you keep posting muppet hopium drivel like that here, you will be bitchzlapped into oblivion.
Troll, I command you! back to your govt cubicle
carambar - why waste your time? Why ask Tyler to show restraint?
When the game is on.....which the Fed has de facto (if not de jure) declared...you ask for restraint?
Pull yourself toward yourself....and get ready for action....'cause it's coming.
Seriously, has anyone in Washington DC thought through the math of all the mortgage modification programs, a Euro/China meltdown and interst/mortgage rates? Obama/Bernanke STILL want to stick taxpayers with enormous losses on Fannie/Freddie needless/useless principal reductions.
http://confoundedinterest.wordpress.com/2012/04/05/fhfas-demarco-decision-on-gse-principal-reductions-this-month-common-sense-versus-the-matthew-lesko-approach/
The Madness of King Ben.
Funny thing is they're going to need a negative rate on even this adjusted forbearance principle. ... not unlike for Sovereigns really, if truth and forethought were to <gasp!> have any say in proceedings.
If the Dow reaches 9000, suppose Ben is so patient, the liquidity spigot will be turned on again.
Growth would not solve the problem, it would only transfert public debt to private debt. Later, private will have to be transfered to public again, and so on.
As Carambar just wrote, it is time that is needed. Current rates on Spain and Italy are causing improvement on these countries current account balance, which is what is really needed to reduce the debt level of these economies.
During that time, In no way the UK and the US will solve their own problem given their rates they currently enjoy. Once the EZ will have solved its imbalances, these two countries will be left with their pants down, ready to be eaten by markets
how does time heal a debt problem where debt is not decreasing anywhere but is increasing exponentially? Seems to me time is just one more hurdle to be overcome.
Debt is increasing but the second derivative is decreasing, thanks to increase in domestic savings and reduction of borrowings
You are unfortunately confusing saving with default.
Default will be met by printing. Government payments will be met by printing.
The Fed will print to cover every last scrap of debt, they will buy it all to 'save the system' (and keep the federal government's lights on and toadies paid)... Even though much of the system will evaporate in the heat of the coming hyperinflation.
You are confusing Spain and Italy with Greece
But you're missing the big picture here, the fiat books will still balance! This matters more! </sarc>
BTW, WTF is "negative growth"? What utter nonsense. Joey Goebbels title was Reichminister for Public Enlightenment and Propaganda. Did those damned nazis read Orwell?
It's the result of vocalising the spreadsheet's bottomline.
Ecoflow:
"Once the EZ will have solved its imbalances,"
Ecoflow:
"Once the EZ will have solved its imbalances,"
I predict the S&P will drop 20% to about 1120 before Ben takes action.
GS seems to agree with me predicting a plunge to 1250:
http://www.businessinsider.com/goldman-still-calling-for-sp-1250-2012-4?...
However, with the Gub'mint spending OPM as if they print it, I see a nice rebound to 1500 nex ttime around.
NSA Builds $2 Billion Spy Center:
http://www.businessinsider.com/top-nsa-general-says-this-new-2-billion-s...
However, like ALL construction projects, this will rise to cost $4 Billion in crisp new bills by the time the project is finished.
Tyler- some unconfirmed rumblings about bank problems....nutting specific
I did the math and as I said two weeks ago... margin call be 'a comin
"This month marks my thirty-ninth year on Wall Street. What a ride it has been. Inflation and Deflation"
When it comes to real wages - inflation is being used to hide the collapse in wages in most western countries. Forty years and counting!
U.S. Standard of Living Has Fallen More Than 50%More deflationary musings, is all. Sure they'll knock her down, but I very much doubt that the urge to print will be supressed for long, besides, who'll buy up all the debt to run the U.S.? Sorry I don't buy it. 39 years or not.
The US Govt will of course ... they figure they'll get an interest dividend on their own debt ... clever! ... this is why Timmay gets the tax-free big-bucks.
I agree with this persons analysis. But another route the Fed could have taken, a swifter route to the rout is this:
http://pearlsforswine.wordpress.com/2012/04/05/new-thoughts-on-quantitat...
Well written article Mr Grant. Your 39 years are 10+ more than mine, however I am looking past the Rout.
The Fed will not be able to print more. That realization is months away but it will be the catalyst for the Rout.
Ultimately there will have to be a gold (or PM) based standard in order for cross boirder trade to occur. It's just a question of when and at what cost in blood and fortune.