We’ve already had a taste of this in 2008 when the Credit Default Swap (CDS) market, which was $50-60 trillion in size, blew up. We’re now rapidly heading towards an interest rate Crisis and the interest rate-based derivative market is four times as large roughly $200 TRILLION.
Other countries are rapidly dropping US debt like a hot potato. Russia has sold off 30% of its US Treasury holdings. China has lowered its holdings for five months straight and has even suggested selling off 2/3 of its exposure. And with even legendary bond investors like Bill Gross avoiding Treasuries, we’re rapidly heading into a debt Crisis that will make 2008 look like a picnic.
Indeed, the next Crisis is coming. And it will make 2008 look like a picnic. Why? Because this time around the Crisis will involve entire countries, rather than just banks (see Greece today). It’s going to be really REALLY bad. And I would argue that 99% of people are completely ignorant of it.
In plain terms, we have not had a period in which the Fed wasn’t pumping tens of billions into the markets since 2007. Indeed, the only time the Fed wasn’t officially pumping its brains out was between the end of QE 1 (April 2010) and the announcement of QE lite (August 2010). So the notion that QE 2 will end and the stock market will stay afloat just fine is questionable to say the least
What happens when the next Crisis hits and a partial if not complete Government shutdown occurs? What happens when that 35% of incomes and salaries stops being paid? What happens when prisons and other Government paid services run out of money? What happens when the next major banking run reveals that there is no WAY on earth the FDIC can truly insure all the deposits in the US (other than more money printing from the Fed)? What happens when the US defaults on its debts?
Remember, we never actually “took the hit” we needed to take in 2008. The same junk debt remains in the system (it’s just been hidden by loosened accounting standards). The same enormous derivatives time bomb is still ticking (it’s over $600 TRILLION in size). None of these problems were solved. None were even addressed.
For the Fed the failure to address any of the underlying causes of the Financial Crisis has been a great success story. After all, all it had to do was pump the financial system full of more money (increasing the amount of leverage) and push for the suspension of accounting standards (so the crap debt is still there, but no longer is visible).
For the Fed the failure to address any of the underlying causes of the Financial Crisis has been a great success story. After all, all it had to do was pump the financial system full of more money (increasing the amount of leverage) and push for the suspension of accounting standards (so the crap debt is still there, but no longer is visible).
Remember, stocks tanked 16% after QE 1 ended in 2010. So far, we’re already down 6% and QE 2 hasn’t even ended yet! If we match last year’s post-QE correction, the S&P 500 will be at 1,144 soon after QE 2 ends. And given the numerous disasters (economic and financial) occurring in the world today, we could easily drop a lot further than that.
The biggest problem with investing the markets today, is that we’ve entered a period in which not one country, but most of the developed world is entering a currency Crisis. Of the countries that back major currencies the Europe, the US, and Japan all face major debt restructuring issues. In different terms, we are witnessing the slow-motion collapse of the entire paper-money based financial system, as well as the unbridled credit growth such a system fosters.
With public outrage soaring the Fed needs things to cool down before it can announce QE3 or anything like it. The one exception to this would be if the markets enter a full-scale Crisis and stocks close in on 1,000 on the S&P 500. The most likely candidate to trigger this would be the Euro-zone where the “bailout game” might in fact be about to end.
Stocks are MASSVELY overvalued today and we’re likely going to see a sharp correction if not something worse before the Fed begins another round of money printing. Once this correction ends, those looking for income might want to consider looking at high quality blue chip companies, MLPs, and other equity-based investments that offer decent dividends, rather than bonds.
The EU’s
days of “kick the can down the road” are rapidly coming to an end.
While most
commentators talk about the EU and its bailout fund as though these are
independent entities, the reality is that the EU bailout story was always about
whether Germany could foot the bill for the more bankrupt EU members.
The US economy has taken a sharp turn for the worse in the last three months. Considering that we never had a recovery to begin with, I believe we’re heading into a very, VERY rough patch here in the US. Without adjustments, the US economy LOST (not gained) over 100,000 jobs in April. Nearly 30% of all mortgages in the US have negative equity. Food prices are through the roof. And we’re actively raiding pension funds in order to fund debt issuance.
Throughout most of 2009-early 2011, any and all bad news regarding the US economy was perceived as positive for stocks due to traders’ belief that a weak economy would mean more money printing from the US Federal Reserve. That situation now appears to have changed. The last two months have seen big misses on virtually every economic data point: the PMI, ISM, Housing, etc. However, rather than rallying, stocks have dropped nearly 5%, taking out numerous lines of support.
