The Fed spent $600 billion on QE 2 and had at most three months’ of improved economic data as a result (QE 2 was announced in November and the US economy rolled over in February 2011). The public is well aware of this as well as the fact that QE 2 saw inflation exploding higher.
I believe it’s only a matter of time before Germany walks out of the EU. When this happens the Euro will collapse a minimum of 20-30% and we will see numerous sovereign defaults. When the smoke clears the EU in its current form will be broken and we will have passed through a Crisis far worse than 2008.
Truthfully the only reason to be long stocks right now is in anticipation of more QE from the Fed at its January 25 FOMC meeting. However, the likelihood of more QE being announced at that time is slim to none. For starters, interest rates are already at record lows, so the Fed cannot use that excuse. Secondly the latest economic data out of the US, while heavily massaged, is showing some signs of improvement, which negates the need for more QE. And finally, Bernanke and the Fed are far too politically toxic for the Fed to begin another massive round of QE (the last one of $600 billion accomplished nothing) just for the sake of it.
The EU, in its current form, is most certainly in its final chapter as both the political environment and market conditions have rendered all proposed “solutions” to the crisis moot.
In plain terms, both the IMF and Germany have stated they will help Greece if and only if Greece agrees to various measures… which they KNOW Greece cannot agree to. And so the Greek issue has become a kind of “hot potato” that no one wants to keep holding. Meanwhile, every day that this issues doesn’t get solved, the EU as a whole moves closer to systemic failure.
I’ve received a number of emails regarding the fact that stocks continue to rally despite Europe being on the verge of Collapse. Once again, investors are forgetting that stocks are the most clueless asset class on the planet.
Indeed, here are three reasons why this latest stock market rally isn’t to be trusted.
Against this highly deflationary backdrop, the one primary prop for the markets is hope of more juice/credit from the world Central Banks. However, even that prop is losing its strength: the gains of the last coordinated Central Bank intervention lasted just a few weeks.
European nations need to roll over hundreds of billions if not trillions of Euros’ worth of debt in 2012. And this is at a time when even more solvent members such as France and Germany are staging weak and failed auctions.
Consider the Central Banks’ coordinated intervention to lower the cost of borrowing Dollars three weeks ago. Remember, this was a coordinated effort, not the Federal Reserve or European Central Bank acting alone.
And yet, here we are, less than one month later, and European banks have wiped out MOST if not ALL of the gains the intervention produced.
The Fed can’t possibly claim it’s trying to lower interest rates with the short end of the curve essentially offering 0% and Operation Twist 2 focusing on getting the long-end even lower (at a time when the 30-year is already under 3% and the 10-year under 2%)?
To put US household debt levels into a historical perspective, in order for US households to return to their long-term average for leverage ratios and their historic relationship to GDP growth we’d need to write off between $4-4.5 TRILLION in household debt (an amount equal to about 30% of total household debt outstanding).
It’s now been two weeks since the Federal Reserve lead a coordinated effort to lower the cost of borrowing Dollars worldwide. While the markets initially hailed this move as a “solution” we’ve since seen that it was in fact an act of desperation/ cushioning of the coming European banking collapse.
I expect emerging markets to underperform US indexes going forward. One chart I use to view how these two assets perform relative to one another is to price the Emerging Markets ETF (EEM) via the S&P 500. When this chart rallies, Emerging Markets outperform the S&P 500. When this chart falls, the S&P 500 outperforms Emerging Markets.
Folks, if you’re not considering the possibility that the current EU is going to be broken up…you need to start doing so now.They’re all out of options over there which means… you guess it… it’s default/ systemic risk rime.
