John Taylor On Why "The Ground Is Not Solid Beneath Our Feet"

Tyler Durden's picture

The Ground Is Not Solid Beneath Our Feet
May 10, 2012
By John R. Taylor, Jr.
Chief Investment Officer

Investors should be questioning their positive assumptions after the events of the past two weeks. Things have changed a great deal and rumors abound on how the authorities plan to support the market now. At the end of last month, only ten calendar days ago, the perky US equity market, the placid foreign exchange scene, calm credit spreads and rock-bottom volatility implied to us and anyone paying even cursory attention that the world was happy with the way things were turning out in 2012, no matter what the Mayan calendar might be saying. But now, after the Socialist victory in France, the Greek electoral disintegration, the poor US employment numbers and the disastrous European PMI readings the market is very uncertain with the EUR/USD below 1.30, Spanish 10-year Bonds back over 6.00% and equity markets down sharply around the world. Our cyclical analysis finds this weakness very appropriate as we should be in a decline. A look back at the letters of the last two weeks will give you a hint as to our state of mind. I am clearly worried that we could be at the start of a serious meltdown in the global markets, not the same as 2008 and not like the flash crash of 2010, but perhaps incorporating some of the characteristics of both. At the same time, as a manager of corporate risk and an absolute return manager, I have to be ready for the government intervention that is sure to come. As you might guess, we are not too optimistic about the Eurozone authorities’ chances of final success, but the bad news will continue and eventually they will do something dramatic. The road to hell is paved with good intentions of governments, but they make for a volatile ride. We know we will be wrong on many counts, but our function as analysts is to lay out our view of the next few months, so here it goes:

We still believe Barack Obama is not likely to be re-elected this November as US unemployment is much more likely to be above 9% rather than below 8%. Although the US economy far outperformed our expectations during the first quarter, nothing has changed and 2012 will be a recession year with the Eurozone registering terrible numbers far exceeding what the market seems to expect. Our estimate is below 2% even counting a generally flat performance in Germany. The real issue is Europe, not the US or Asia, but the drag spreading from its weakening banking structure will impact global trade and the animal spirits of the entire world. The picture is bad, but our cyclical work implies the global markets should bottom in – or risk will be off through – the period between September and November. The ferocity of this decline might be muted dramatically if the European authorities can figure out a way to minimize the North-South divisions that are tearing the Eurozone apart.

What makes the ground so uncertain beneath our feet is the reality of our current position: interest rates are at zero, fiscal budgets are stretched to the maximum, total national financial liabilities are at a breaking point and national monetary bases are a multiple of the highest they have ever been. Quite simply, there are no good borrowers. No one wants to loan anyone any money. Fiscal consolidation must be carried out, and that tends to mean recession and loss of wealth, which will negatively impact financial markets. Although this can theoretically be an orderly process, the most likely course is not a fair parceling out of pain, but a frantic protection of selfish interests in which those with the upper hand will punish those that are weak. Currently, the crunch is focused on Greece and the other indebted Eurozone countries, but their agony is almost certain to radiate throughout Europe and the world, unless they are given a kindly helping hand. Unfortunately, we are almost certain this will not happen. Not the IMF, Bernanke’s QE3 or any BRIC miraculous assistance will put this issue right, and the risk-off fervor will take global equities down, stop global credit growth and strengthen the dollar.

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Nolsgrad's picture

meh buy da dip! bernank's in control and Europe is fixed!


SheepDog-One's picture

All is WELL in the land! Its all rainbow unicorns sharting gold dubloons and pissing chilled pink lemonade!

DormRoom's picture

It was the best of times. It was the worse of times. Charles Dickens recognized the Schrodinger economy back then.

Oh regional Indian's picture

Schrodinger to Humdinger is 10 quick decades.

Meanwhile, John Taylor is fractally correct. If you track the earthquake numbers since Mid 2007, the less than solid ground beneath our very feet becomes scarily obvious.

Quaking earth and excess liquidity. 

Makes for Tsunamis I think.



deez nutz's picture

It was the best of times. It was the worse of times.

.... ye shall buy market in the best of times and ye shall buy market in the worst of times.  Ye shall buy market everytimes! -Ben Bernanke

Haole's picture

If unemployment is more likely above 9%, I wonder what it would more likely be above given that more likely above a quarter of the country in terms of working-aged citizens are SOL and have fallen off the propagandized and manipulated statistics altogether?

CrashisOptimistic's picture

They aren't manipulated.

They just are old normal designed and are failing to be meaningful in the New Normal.  For example, unemployment means nothing in a world where people discovered that they could make unemployment benefits permanent by qualifying for disability.

The disability rolls have exploded.  That's where the Labor Participation Rate went.  

The measures aren't intentionally missing that.  They were just never designed for Apocalypse.

Bizaro World's picture

These are not the percentages you're looking for.

For real inflation numbers and real unemployment figures, go to:

disabledvet's picture,0,7754...
let's see...who else is making money through lending...,0,10463...
yep! government!
"but interest rates are too low!" screams Wall Street. "If the bond market just blew up we'd be partying like it's 1999!!"
I say "stay long the most capital intensive projects on the planet" as it's never been a better time to NOT be some clown on Wall Street but to do something useful. this looks like fun!
if you can't start with a blank sheet of paper and go from there don't even bother folks! never been a better time to be a risk taker. "competition" is for far too many sectors "in abeyance." these are guaranteed profits folks. sure..."doesn't guarantee a higher stock price"...but take a look at "the other guy" as they say. provided consumer demand is there of course...

CrashisOptimistic's picture

I can tell you a good business startup for a risk taker.

Plug and abandon oil well firms.

These are the firms that go out and plug empty oil wells with concrete and do so obeying all necessary regulations.  

The Bakken's hyper fast draining wells are going to be needing this service in huge numbers over the next 5 years.


SheepDog-One's picture

Gee thanks Bernank, for totaly destroying the US markets.

xela2200's picture

There are many other that share the blame including ourselves.

The Navigator's picture

Let me help - there are so many other government agencies that share the blame for fucking up the markets.

Jack Burton's picture

The authorities and their central bankers will respond to any market falls by juicing equities with the usual mass liquidity dumps. ZIRP loans to all the Feds good pals will allow mass equity buying with the free printed billions. Nothing changes from week to week except the amount of printing and liquidity injections.

The Fed owns the market, traders trade the Fed, not the fundamentals.

The CNBC whore show pretends market action is normal and traders are trading fundamentals of the US economy. Instead the big investment banks and hedge funds are using ZIRP billions to High Frequency front run the latest Fed action that their pals in the fed have signaled to them via insiders. Front running, insider trading and HFT trades are fuled with Fed liquidity. Billions in profts are pulled out by the insiders and Fed pals.

The 401K crowd and what retail investors are left are simply dupes to be screwed to the wall. The markets are a manipulated HOAX!

To quote Bush "This sucker is going down". When it sinks, a few connected bankers and hedge funders will have cashed out a trillion or more in profits, all others, like all average Americans will be friggen screwed for two generation minimum.

Obama or Romeny? Take you pick, they both plan to screw us badly.

StychoKiller's picture

I'll write-in Ron Paul if necessary!

Paul Atreides's picture

I have this gut feeling there aren't going to be any elections in November...

Rubbish's picture

The choice is clear. Ron Paul or get ready for collapse.


We probably will collapse anyway but at least we will know our borders will be secure and we will eat like kings. Make your own whiskey and grow your own pot.

Lord Koos's picture

The idea that if Ron Paul gets elected POTUS, then everything magically is OK, is delusional. It would be like a fully loaded oil tanker going full speed being able to stop within a quarter mile. 

kridkrid's picture

yup... Ron Paul (or Ron Paul ideas) are for after the collapse... not to prevent one.  A Ron Paul victory would be counter-productive as it would take the blame for the collapse.  I first voted for RP in 1988 when he ran on the Libertarian ticket.  I'm a huge supporter... but I've decided to sit this out.

The Navigator's picture

If you're right, that explains the DHS purchase of 400 Million rounds of .40 cal ammo.

Cabreado's picture

"implied to us and anyone paying even cursory attention that the world was happy with the way things were turning out in 2012, no matter what the Mayan calendar might be saying."

Mr. Taylor,

What a very strange thing to say.

Yes_Questions's picture



Right where I stopped and scrolled down for the comments.


Right where it lost me.

Glad I was not the only one.



supersajin's picture

I might get laughed off this board but I don’t care. IMO all of this is happening right on schedule. Those of us who know about 12-21-12 are not limited to aluminum hats wearing (funny how they it does block cell tracking), 60”s living pot heads.  Some of us work in the federal government.  Globalists and those who control world governments know exactly what’s coming and they are squeezing every last drop out of the sponge before it pops. 

Their day is at hand!! 

CrashisOptimistic's picture

You won't get laughed off the board.

No one will waste even that time on you.  There are more laugh worthy commenters.

mcguire's picture

and who controls those who control world governments?

mcguire's picture

hint, it starts with an "L" and ends with an "ucifer"..

l1b3rty's picture

Is silver the achille's heel of the financial system?

Silver Liberation Army.Com

ArrestBobRubin's picture

Well, let's put it this way: was Achilles' heel the Achilles' heel of Achilles?

Freebird's picture

Anyone know when you microwave popcorn the average perentage of kernals that don't, well pop?

PersonalResponsibility's picture



Think we're on to something here.

infinity8's picture

% of grannies? They're delicious. Would like some genetically-modified-to-give-max-granny popcorn. please.

Bicycle Repairman's picture

I'm sure there is a PHD thesis on the topic somewhere on the web.

AlaricBalth's picture

Or more likely, a study was conducted on the subject which cost $17,000,000 and was funded by the National Science Foundation through a grant subsidized by U.S. taxpayers.

The Alarmist's picture

3% to 6% at the factory, and anywhere from 6% to 30% depending on how it is stored, how old it is, and the heat and time applied.

vincent's picture

"We still believe Barack Obama is not likely to be re-elected this November"

 So, you also believe Mr. Paul will be the nominee, cause that's the only vote millions of Republicans (and independents) will be casting...writing in if necessary. These 25% (or more) are not going to cast an anti Obama vote. Many actually have principles.

There will be no rally around Romney, the nominee. Flash back to Perot and listen to the siphoning sound.

The Obamafia can easily keep this public in a trance for another 6 months)



DeadFred's picture

Sadly the sheep will vote the way they are told to vote. If you want to see who will win wait 'til October and check the cover photos on the MSM news mags. Think of the 2008 close-up cover showing the pores and blemishes on Palin's face. With thousands of photos available they choose just a few and they tell the masses who to vote for. I've been tracking elections with this method since Nixon and it has never failed. Bush/Gore was a toss up but then so was the election.

The Navigator's picture

Then, we're really fucked. And the "1 more year prayers" are for naught. We'll be really really fucked.

I pray that my ZH brothers and sisters are well stacked and stocked and that you have a stay plan or Bug Out plan.

When TSHTF will not be the time to prep or plan.

I am a Man I am Forty's picture

OT:  For anyone that still does invest/trade in stocks, I think BP is looking incredibly cheap at 5X earnings and close to 1X book value.  Huge discount to its peers.  Plus yields 4.7%.  I started a position today.  Any thoughts?  ps I know shit is hitting the fan

The Alarmist's picture

"We still believe Barack Obama is not likely to be re-elected this November as US unemployment is much more likely to be above 9% rather than below 8%.

Wrong! Unemployment will be below 7%, even if they have to take 100 million out of the labor force to make it happen.

As for Taylor, still talking his book and trying to make up for being short the Euro for the last year.

Bizaro World's picture

Wisest post in the thread....fictional unemployment numbers are the easiest to manipulate.

But Nobody bring up the record setting 46M on food one infamous lib said, those are good numbers, that's money their pumping back into the economy. Even the sheep aren't that gullible.

Tuffmug's picture

Mr. Taylor is a fool to believe the players are out of bullets or prevented from acting. The FED and the ECB are putting in orders for more printer ink to make their bullets, fresh fiat money to steal by stealth the accumulated wealth of the world. Can't let the massive worldwide fiat Ponzi collapse because a pipsqueak ass fucking country can't pay their bills.

I am a Man I am Forty's picture

Right, Fed's coming to the rescue in June.  ZH has posted what GS  and others are predicting.  QE3 confirmation in June.  Wash, rinse, repeat.

DeadFred's picture

Goldman only speaks the truth when it serves their purpose. If they know (probably they told Bennie what to do) why would they tell you? Whatever they're saying they say it to try to get your money, always. If you think you can triple-reverse-psych them I encourage you to try because they do know, but don't think a sociopath org will just tell the truth.