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Mark Grant On The Dangerous Road Ahead
From Mark J. Grant, author of Out of the Box
The Dangerous Road Ahead
“The last time Quantitative Easing was stopped the equity markets dropped precipitously. There is no reason to think that will not occur again though the severity may be less. Today's FOMC minutes are quite significant in my view. They also said, for the first time, that the pledge to hold short rates at near zero was "conditional." This is another very meaningful statement. I would be taking money off the table now in both equities and bonds as the stock market will probably head lower and yields will begin to rise in fixed coupon securities.”
-MJG, April 3, 2012, 2:16 pm
This was the note that I put out to the readers of “Out of the Box” sixteen minutes after the Fed released their monthly report. That was as fast as my fingers could type what was going on in my mind. I thought it was good advice to the 5,000+ institutions that receive my commentary and I have become more positive about it as the days have rolled along as the Dow Jones Index has dropped 350 points since I typed my musings. In fact, we are just at the beginning of a great divergence where credit assets, risk assets, decline in value and where Treasuries head in a quite separate direction as driven by U.S. data in part but, more significantly, by the travails in Europe. The CDS for Spain reached an all-time high on Friday reflecting the financial issues in Spain as the Spanish bond yields creep higher held back, in part, by the threat of intervention from one of Europe’s stabilization funds.
We have just been presented with one very red flag signaling the seriousness of the issues in both Italy and Spain. Spain just announced that its banks borrowed $415 billion from the LTRO funding while net borrowing stood at almost $300 billion and accounted for 63% of the net borrowing at the ECB. For Italy the number is $354 billion in LTRO borrowing and they are not that far behind Spain in needing aid. The actual debt to GDP ratio, which I detailed on March 29, is 133.8% for Spain, not the official 79% number, and is getting worse as their economy shrinks and as the country guarantees ever more bank debt to be used as collateral. It is not much better in Italy as the combined national debt and their share of the debts at the ECB and the EU peg Italy’s actual debt to GDP ratio right at 200% and while Italy’s ability to self-fund is appreciably better than Spain; their funding needs are becoming appreciably larger as the country sinks into recession.
For the moment both the Fed and the ECB are not engaged in Monetary or Quantitative Easing. This has been the driving force for both equities and for bonds for the last four years. Yields have been lowered, spreads have compressed but I think we are now in the early stages of a massive reversal where stocks decline and where yields rise and a widening takes place between Treasuries and every other asset class. In my view, during the next several months, the situation will continue to deteriorate and so I continue to advise taking profits in both equities and bonds and re-deploying the money. I would stick with various structures that float or step-up and I would avoid bullets as losses will accumulate both from the absolute rise in yields but also from the widening in spreads.
The one other area I am becoming quite concerned about are the banks; in particular the European Banks. Of the twenty-five largest banks in the world there is only one that does not need to raise additional capital to de-lever to a 20x leverage and a 5% of Tangible Capital Ratio and that is Citigroup which has a current leverage of just 13 times and I also point out that Wells Fargo with a 14 times leverage needs a minor amount of capital to accomplish these goals. At the far other end of this scale is Deutsche Bank which is levered 62 times and would need a massive amount of new capital and tremendous shrinkage to accomplish these goals. The assets of DB are also equivalent to the entire GDP of Germany so that the bank could devour the country if Deutsche Bank were to hit the wall. Then the most leverage can be found at Credit Agricole at 66 times which would also swamp France, given its size, if asset values continue to decline or if Spain or Italy need to be bailed out and the contagion worsens.
“It is in the uncompromisingness with which dogma is held and not in the dogma or want of dogma that the danger lies.”
-Samuel Butler
-Mark J. Grant
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I would love to see an update of this chart
http://quantifiableedges.blogspot.com/2011/08/post-qe2-pomo-indicator-up...
ECRI still stands behind its recession call.
http://video.cnbc.com/gallery/?video=3000075118#eyJ2aWQiOiIzMDAwMDc1MTE4...
Keep in mind the equity markets were rallying hard right before the EPIC 2008 financial collapse. Deja vu.
Screw this guy.
All of these financial wizards cry "dangerous road ahead" when Fed takes away stimulus because the real magic to their success is Fed's money printing not any ability to predict anything.
Capitalism during bonus time, Fed Reserve's socialism during recession time.
Every mirage has an ending.
Hey, I always wanted to know, is that Avaatar you? Or Rasputin? Rather intense...
You can't solve a solvency issue with liquidity, the system can only absorb so much...
But oh yes, choppy waters ahead. Did people read about the 4 feet of hail in Texas? And then a flash flood that followed....
It's getting w e i r d....
ori
stream-of-consciousnesstwo/
Hey ORI, it's Jim Morrison.
Yes, getting weird as the ring of fire is coming online again:
http://www.prisonplanet.com/preparing-for-fukushima-2-0-earthquake-activ...
The powerelite have lost control. SHTF is coming very soon:
http://www.prisonplanet.com/homeland-security-unveils-monstrous-swat-tru...
Aha, the wooly Lizard King!
And wow! That truck is Crazy!
ori
Large Hadron collider @ higher energy beams = Improbability drive.
yup DormRoom. Try telling that to a group of normally biased folks though..... instant switch-OFF.
ori
I gave you a greenie but it didn't register. Milestones
Does that Citi number of 13x include off balance sheet "assets"?
The FDIC & Fed have the multi trillion nominal derivative exposure covered.
So we got that goin for us!
LOL- yeah, when they start using Citi as an example of the good, we're got trouble....
i assure you the shadow books were not factored in, and that's unfortunate that the author would make such glaring omission.
nine
Who then is buying US treasuries? The answer is the Federal Reserve so while they are talking one game, one needs to watch what their actions are. If they stopped buying bonds, rates would hit 10% overnight with this debt load.
"Hey, look over here"
Uncle Shalom
Well actually "Hey look over here" is the purpose of the Trayvon sob/injustice story, which the media and the usual race hustlers have distorted and ginned up. Meanwhile enormous amounts of debt have been printed, and the data indicates hitting debt ceiling around election time rather than in 2013. One scrape that turns badly somewhere among the 300 million individual stories in the USA should not be a national matter consuming presidential or justice dept bandwidth, but it is, because they intend to exploit distractions to the max. We have to learn to ignore bullshit stories like this and speak with one voice on the ICEBERG dead ahead.
This meme doesn't fly anymore. QE2 ended June 2011. There is no direct, NET buying of US T's by the Fed right now. There has always been GROSS buying of such because they roll over holdings as the holdings mature. But there is no new NET buying right now.
Buyers of US Ts right now are pension funds, mutual funds, hedge funds, foreign entities and banks, and those banks are using money borrowed from the Fed. They buy US Ts because there is nowhere else to go with that much money. Simply that.
Intruding with reality here is usually not well-received.
Depends on your definition of "reality".
"borrow from the FED"?
Yes, they are monetizing/counterfeiting 24/7. How's that?
On the contrary, bring it, there are plenty of ideologues in here but reason has a good chance to win the day, unlike in the MSM where resistance to the received wisdom is futile. Your "meme" implies that all is normalized since Mr. Fed is not buying most/all issuance right now. But isn't the effect the same if The Bernank is just passing out free money to banks so they can turn around and buy USTs? The questions is, where is the leverage and where/what is the collateral? The Fed is levered 89:1, and the "1" is some fantasy MBS...oh, yes and a supposed nice little pile of shiny stuff. So the point stands.
James Grant's talk at The Fed called "A Piece of My Mind" contains more wisdom and insight than 1000 Dudleys or trolls that's for certain.
correct. the buyer buys directly or by proxy, but the buyer does buy, more at GROSSLY intervene.
Agreed - thanks for posting.
Also, what's your take on what the author means by Deutche Bank "devouring" Germany's assets?
the author is trying to shit everyone up with the nonsense if Deutsche Bank went tits up, with obligations as big as Germanys GDP, the country would also go tits up
this 'we need to support the banks because they're so big and important' myth is complete BS ..most of what banks write and do is financial froth and unimportant to the real (productive) economy
Banks are the biggest pile of worthless fractional reserve fraud ever devised in human history.. like my beef with Jim Sinclair claiming if the $700Tn in derivatives went 'Bang' it would be curtains for the global economy ...absolute rubbish
if all the car, boat, health and home insurance policies went bust tomorrow nobody on the planet would notice or give a crap.. ditto banks and derivatives
ok if DB goes tits up alot of Germans will have their wages and savings disappear overnight
but all the other crap DB writes and the global derivatives market is worthless and will only effect the muppets invested in it (declaration: i, muppet, own a couple of ETF's)
So the banks,who own the Fed,are buying the UST's.
How is that not another banker shell game ?
If the market tanks, thats the last nail in Obama's electoral prospects. He be gone and the Mitten be on.
Even banks passing these stress tests are debateable as far as solvency goes. Christ, DEXIA passed with flying colours and all is well and lo, within 6 months they are Bankrupt! Imagine that bullshit happening to Santander in Spain. Royal Bank of Canada is so stupid they just bought some of the DEXIA it didn't own already. I have some ponds containing radioactive tailing in the oilsands for the idiots
Bullish!
boy when Citibank is the best bank on any list, the system is clearly doomed
I thought he was joking when I read it. But maybe your'e right, he may have been serious.
The bar is set pretty low when the list includes Credit Agricole, leveraged 66 times. Which means that even a tiny, 1.5% decline in equity would render them insolvent. Too bad they're the largest banking group in France, second largest in Europe.
"Doomed" doesn't seem like a strong enough word.
Amazin what constant stock dilution does to the credibility of a bank right?
OK with that backdrop the ECB will provide more liquidity, continue to prop the overlevered balance sheets of the EURO mega banks, etc, etc, Central planning works!
When banks are allowed to mark assets to fantasy, do these stress test numbers mean anything at all?
Don't believe the Fed narrative. Interest rate spikes will destroy even the least thinly capitalized zombie banks. The Fed will sacrifice the currency before the FDIC will be put into the impossible position of taking over the financial system.
I think we overlook one big tell at our own peril, a paradox if you will.
As you state,"The fed will sacrifice the currency...." I have to spin a different web.
The fed is impotent and has lost all respect and creditability. Its QE debacle is right out of Japan's ongoing nightmare playbook.
Bernanke might want to QE forever, and take the dollar down the crapper, but what of the standard of living of the working man / woman? We will be decimated,and so I posit he will not only be forced to the sidelines, he will for a short period of time, defend the dollar. There is a reason why the U.S. dollar is referred to as King Dollar, it is known and accepted on every point of this planet. The dollar will become so valuable / sought after,(this is what drives depression / deflation) that at some point well north of where it trades today, then Bernanke and the central bankers of the world(Fools of the world) will bring it back down gently and with some form of recapitalization on a global scale, maybe something new called "cubits", who the hell knows. But one thing is for sure, this nightmare and the progressive / socialist powers that reside in this administration have a plan, they have been crafting it for years.
Congress has been irrelevant for a few years now. The "Apollo Alliance" crafted the so called rescue fund / 787 billion dollar fiasco we were force fed at the height of the crisis. Soros is the puppet master of this global "One World Order" and with him and Bill Cinton's "Clinton's GLOBAL initiative", Soros and his "Open Society Institute", we are all headed to a place where America gives up her role at the "Commanding Height" to some perverted form of a one world governing body ala the U.N.
I pray I am wrong, but nothing seems to make sense and the further down this cesspool we get flushed, anything this perverted seems possible....
May the good lord watch over this fragile little experiment in freedom / mans self rule we call America.
Jerry
Jerry, the men behind the biggest guns- which are increasingly more like video games than reality- will undoubtedly try to recapitalize with another confidence scheme- like the SDR- with their allies the political winners. If they succeed in selling it to a super majority peacefully, they can marginalize the "terrorist" resistance. If they can't, it will get ugly for those who choose or stare at the end of the barrel and fight.
"Soros is the puppet master of this global "One World Order" and with him and Bill Cinton's "Clinton's GLOBAL initiative", Soros and his "Open Society Institute", we are all headed to a place where America gives up her role at the "Commanding Height" to some perverted form of a one world governing body ala the U.N."
You are on the right track, but you are going to piss off the CB Cartel, CFR members, etc if you try to give all the credit to Soros and Clinton.
Self-rule in America ended in 1913.
if not 1865, or possibly even earlier, with crushing of Shay's rebellion in 1787, under the Constitution's precedessor, the Articles of Confederation (in other words, there was self-rule only for a brief period after the British surrendered at Yorktown. Shay's Rebellion was about debt and money -- too much of the one and too little of the other. It turned out that it made no difference whether the form of government was monarchy (bad) or republic (good) - the creditors wanted to be repaid.
Quantative easing must be stopped. The FED buying bonds and junk securities is downright criminal. Save us Anonymous billionaires! We need your legitimatlly aquired capital
You mean all that capital they legitimately paid politicians for? Spread a few thousand here & few thousnad there, and viola! - a newly revised regulation that adds billions to the "capital" base. Sober up & get a clue, Native.
It is IMPOSSIBLE to rekindle “animal spirits,” living on George Orwell’s Animal Farm—where “all animals are equal, but some animals (pig banksters) are more equal than others.” Ten thousand banksters deserve to be in maximum security prison.
But Wall Street banksters pay protection money to politicians, so we have a loss-of-trust and a shitty economy. I call this a lousy tradeoff.
I would settle for the few really dangerous progressives we have here and now influencing the powers that be,
Van Jones, Frances Fox Piven, George Soros, Al Gore, Bill Clinton, Valerie Jarrett, Bill Ayers, Warren Buffett, Stephen Lerner, Richard Trumka, Andy Stern and then the simpleton hate mongers Jesse Jackson, Al Sharpton, Jeremiah Wright, Louis Farrakan, and last but not least "The New Black Panther Party", thats a good start..
But we cant have a radical list without our own communist and chief himself,
OBUMMER!
Lord have mercy!
You left out Cass Sunstein.
You know, I knew I was going to forget someone. Thanks Bam_Man!
I should have led off with Cass, he is the most dangerous man in America today!
He answers to no one and is the father of the 'NUDGE" movement.
Thanks again and we could go one step further and name his wife,whose name escapes me but is another Soros minion and the author of the U.N. 's new so called law," The need / right to protect" or some such garbage that will get this once mighty country into deep shyte in some god forsaken hell hole we have no business in to begin with!
Samatha Powers, that's her name. Another agent of God's work, right up there with Anita Dunn!
Jerry
So....is it safe to put cash back into my Wells Fargo acct?
Or a safety deposit box.
Elliminates the FDIC failure issue, and some, but not all, other sorts of tyranny that might come in a bad enough crisis.
And it isn't like you would be forgoing much interest income.
Safe deposit boxes could present a problem should the bank you have it in is padlocked one day when you need to get to said safe deposit box!
Reminds me of something my daddy used to say all the time,
Hey Pop, where did you put that?
"I put it some place for safe keeping, trouble is I just cant seem to remember where I put it, but it's safe!"
Have a good one....
America is great because Americans are good,
despite the heckles of the left / progressives that would take us down and replace our constitution with a "Law's Of Man" communist manifesto!
Jerry
I don't get it. As a European, shall I buy Treasury Bills yielding 1% (to protect parts of my purchasing power for the time being in USD in case EUR dies?). Ok, fine. But what happens when my bank blows up and has rehypothecated my bond? I lose everything.
So maybe as a retail investor, it might be better to stuff USD paper currency under the rug, if I were to make this a doomsday €-death currency play, I think. And under the rug, the appreciation will be tax-free. Because 1% yield doesn't matter, really.
But the FED will have to print a lot anyways when € dies, to make all the banks whole in nominal terms, so one might think of the shiny yellow stuff again.
This is tough for me to state, but a six month need of cash stuffed under the rug in greenbacks might not be the worst thing to do for a European right now.
You answered your own question.
GOLD & SILVER
No, I mean according to Mark Grant. If I read right between the lines, metals are kind of a risk asset to him.
Okay. My mistake. I mean his...
It couldn't be more clear. "I would stick with various structures that float or step-up and I would avoid bullets as losses will accumulate both from the absolute rise in yields but also from the widening in spreads."
How often have I read these articles and when I get to the prescription part, the handwriting is illegible?
anyone thinking the US is the weak link shouldn't read this. bernanke put the load on the Feds shoulders, something the ECB can't really do, and now our banks are deleveraged (read no more QE). the EU is up against it, with millions of muslim immigrants, dependent on ng from russia. while they try to wiggle out of their currency problem the US could actually create a north american currency to compete, just in case anyone thought we didn't have the reserve currency. the empire naysayers (and expats crying about the end of america from some rich suburb in an east asian police state, initials JR) can crawl home. of course living in the preeminent global empire is never easy, when fast talking wannabes like we have on deck this year, remind us. once the die is set some real leaders will step up to the plate. (someone who knows the difference between the US and a Chinese worker bee society, the last two POTUS had no concept) i mean who wouldn't want to sit on top of the american empire as it reaches ascendence? and a real leader will know how to make america great. got one coming soon, i hoope.
LOL. Thanks for the comic relief.
people (you) really want dictatorship nowadays. Rather scary i must say
i warned you not to read this..
but there are all sorts of dictators in the world. and why anyone would exchange the US variety for some tinpot pretender and a jungle hammock begs the question, have they read too many graham greene novels? this place in time belongs to america, why trade it in?
dellusional. clearly.
you're childlike obviously, charming but not a good plan
There once was a country named Germany,
Whose infamy lasts for eternity.
It wasn't the Nazis
(Although there were lotsies)
But denying that debt makes infirmity.
if Germany had succeeded (god forbid) there would be no Soviet Union, no Communist China probably, and no state of Israel.
As the slippery slope continues to disintegrate, the law of averages will take on a new meaning.
For a good laugh - check out Seeking Alpha: http://www.washingtonpost.com/opinions/fix-income-inequality-with-10-mil...
Well, they solved healthcare by passing a law that everyone must buy it. Maybe the solution is just another law requiring everyone to be a millionaire.
Didn't Italy try that with the Lira?
Does anyone know if the "low" leverage of these US banks includes their portfilio of homes and CDS exposure being "marked to market?"
Didn't CITI fail the recent stress tests?
I see where you are going with this.
i think Citi was denied an application to pay a dividend on their stock recently. the USG gave Citi (and Wells) the most support in the crisis, probably because they have an international retail footprint. the Citi execs were above some of the questionable dealings that were going on other places. they (Citi and Wells) also had most of the bad mortgage paper, which bernanke now has safely in his lock box.
you can in some ways see them as victims in this, if you didn't take loans from fraudulent originators, the other banks would eat your lunch, and probably buy you out.
BOA on the other hand got the cattle prod enema, as Bernanke and Paulson took Lewis in the backroom, (broke the law) and dumped Merrills assets onto BOA shareholders, without opening the books. BOA probably won't make it in the current form, but their status as a customer bank is less defensible than the others.
and of course Paulson is Goldman, or the other way around, who really put the fire under the bogus MBS markets. if USG had let the chips fall we would all live in the US of Goldman right now. so Bernanke was also watching to see that Paulson didn't pull off the coup.
now at 14x leverage currently these guys are strictly retail banks, and if this was their goal, to save retail banking this is good news. it wasn't done fairly, or legally, and USGs only defense is that Goldman would own everything if they hadn't saved Citi, Wells and BOA. Goldman earned FDIC insurance, but has no retail business, if they had acquired all those banks their business model would be to drain customers of their cash in a way that makes MF Global look like childs play.
and of course current POTUS was a major disappointment in that regard, riding the squid to glory, while he portrays Romney as the child of Wall Street money. what a laugh. maybe Romney will portray him as a racist, then we can laughs all around.
Hard to believe you're being serious with this.
Keep reading ZH, you'll get there.
among the everything Goldman would have owned if usg hadn't intervened, would have been all the otherwise unredeemable payments due from AIG on the MBS (and other) CDS insurance AIG wrote - I believe that would have put a fair dent in the GS BS
You miss the the point in your comment about mortgage originator fraud.
Wells Fargi is in fraud upto its nose.Citi to its waist.The fraud on RMBS investors sold
toxic AAA mortgages multiple times into multiple trusts.Fraud on the CDS
counterparties, and fraud on the taxpayers.
Mortgage origination fraud was but the tip of the iceberg ,one used by the
banks as a smokescreen, to the much bigger crimes commited by them.
Those crimes required a further crime a la robosigning for cover.
Sooner or later one of those RMBS investors could bring a private criminal
prosecution against the banks.Its still legal here in the USA but hasn't been done
in over 90 years.Somebody needs to do it.The DoJ or state Ag's will not.
It will not be hard,the evidence is everywhere.
That article states..."....and so I continue to advise taking profits in both equities and bonds and re-deploying the money. I would stick with various structures that float or step-up"
I'm a simple little scottrade person trying to preseve my retirement funds, Could someone please give an example of what he means by "structures that float or step-up" ?
Thanks in advance.
Gold, Silver, Farmland, Real estate, Non perishable food, Bullets,
Just think about a car salesman telling you, It's the last one we have. You'll grow to love the snakeskin green exterior color, complimented by tangerine leather seating.
Please also consider the possibility that you may be getting front-run by the brokerage firm itself.
The author forgot to mention the impact of risk-weighted assets on DB's balance sheet. As everyone knows, sovereign debt, from an accounting point, is still a very low risk asset.
DB doesn't publish what is in their sovereign book, but I can't imagine much of any PIIGS assets in there, they are a big buyer of bunds (who else has the balance sheet to buy at the levels the Bundsbank needs??)
That is a very different leverage "issue" compared to say Dexia. And BNP is full of French bonds. It is doable to count backwards to see how big the non-German/French etc bond might be because holding crappy assets, like
Spain, will significantly increase a bank's interest income. That trend doesn't show up in DB's P&L.
On the other hand, DB has a huge US book full of crappy stuff ("Taunus") - that is their real headache, and should be. Their U.S. CEO got the boot because of it.
"devouring Germany" is a strange statement, since 85% of Deutsche Bank's business is outside of Germany. Like all the really global banks, they are too big for any one country regulator/system to handle.
"Like all the really global banks, they [DB] are too big for any one country regulator/system to handle."
true, true. "Zombie Banks" author Yalman Onaran (and no doubt others) suggests what's needed is a multi-national regulatory body to supervise the TBTF/SIFIs with extensive international operations with all relevant players agreeing to terms of proceeding beforehand (Lehman, he says, estimated 2,000 international subsidiaries when it filed; actual number turned out >3,000, and bankruptcy proceedings now ongoing in >50 jurisdictions worldwide, under frequently different rules -- think MF Global rehypothecation rules). So, yes, the TBTF/SIFIs have grown too big for even the big boys of regulation to handle -- this will be how the one currency to rule them all will be instituted, through the regulatory camel's nose under the tent of liberty (what's left of it).
little off subject it looks like robots are trading south of the border
http://www.cnbc.com/id/47045445
The Big Picture Wile E. Coyote Equity Top.
http://www.zerohedge.com/news/2012-12-24/market-analysis
Prepare for a substantial USD rally.