Tuesday, May 31, 2011

The Fix Is In, Stocks Set To Plunge, QE3 To The Rescue

"The Fed’s balance sheet is careening towards $3 trillion and, after the latest round of money printing ends next month, the plan is to keep it parked right there and wait to see what happens, much in the same way that a little boy would randomly mix things together from his chemistry set and then sit back and wait to see what happens."
 -Tim Iacono

When Faith In U.S. Dollars And U.S. Debt Is Dead The Game Is Over – And That Day Is Closer Than You May Think
A day is coming when the rest of the world will decide that it no longer has faith in U.S. dollars or in U.S. debt. When that day arrives, the game will be over. Traditionally, two of the biggest things that the U.S. economy has had going for it were the U.S. dollar and U.S. Treasuries. The U.S. dollar has been the default reserve currency of the world for decades. All over the globe it was seen as a strong, stable currency that was desirable for international trade. U.S. government debt has long been considered the "safest debt" in the entire world. Whenever there was a major crisis, investors would flock to U.S. Treasuries because they were considered a rock. Sadly, all of this is now changing. Today the rest of the world is losing faith in the U.S. financial system. In fact, even the United Nations is now warning of the collapse of the dollar. But if the U.S. dollar and U.S. Treasuries collapse, that will be an absolute nightmare for the U.S. economy. If the rest of the world does not want our dollars someday, then what are we going to give them in exchange for all of the oil and all of the cheap imported goods they send us? If the rest of the world does not want our debt someday, then how in the world are we going to be able to continue to consume far, far more wealth than we produce?

The rest of the world is watching the U.S. government run up record-setting budget deficits and they are watching the Federal Reserve print money like there is no tomorrow and they realize that the U.S. financial system is slowly imploding.

Our politicians continue to assume that the rest of the world will always want our dollars and our debt, but that is simply not the case.

Over the past couple of years, global leader after global leader has publicly talked about the need for a new world reserve currency.

In fact, globalist institutions such as the IMF and the World Bank have been very busy discussing what the world is going to use as a global reserve currency after the death of the dollar.

The rest of the world is not sitting around waiting to see if the U.S. financial system is going to recover. They are already making plans for the demise of the dollar. They are increasingly using other currencies to trade with. They are becoming more hesitant to buy more of our debt. They are realizing that the days of U.S. dominance are coming to an end.

UN sees risk of crisis of confidence in U.S. dollar
Rob Vos, a senior UN economist involved with the report, said if emerging markets “massively start selling off dollars, then you can have this risk of a slide in the dollar.

“We’re not saying the collapse is imminent, but the factors are further building up that we could quickly come to that stage if other things are not improving quickly on other fronts — like the risk of the U.S. not being able to service its obligations,” he told Reuters.

David Stockman: Both Political Parties are Full of Morons
By Wall St. Cheat Sheet
“For the last six months, the Fed has bought nearly 100% of this $6 billion a day that’s been issued. Once they are out of the market, where is the new bid, where is the new demand going to come from? The Chinese (NYSE:FXI) are getting out of the market because finally they are having to deal with the rip-roaring inflation they have had. The people’s printing press of China will not be buying as much U.S. debt (NYSE:TLT) because of its own internal problems.”

“When we get to real investors, what are some of the real investors saying today? PIMCO is short the bond, they’re selling, they’re not buying.

“When we get into a two-way market when real investors began to look at real risk, begin to look at the gong show in Washington and the magnitude of the gap that we are borrowing, I think we ‘re going to get a re-rating of sovereign risk. We’re going to get a huge dislocation in the global bond market, and then maybe the wake-up call will finally come.”

“The problem is not the debt ceiling. When push comes to shove, at the 11th-hour, they will do it for a couple of weeks or months and we will have a little more borrowing headroom and will be back to the same impasse where we are now.”

“The real problem is the de facto policy of both parties is default. When the Republicans say no tax increases, they’re saying we want the U.S. government to default. Because there isn’t enough political will in this country to solve the problem even halfway on spending cuts.

When the Democrats say you can’t touch Social Security, when you have Obama sponsoring a war budget for defense that is even bigger than Bush, then I say the policy of the White House is default as well.”

“That is the question that really needs to be understood better and appraised by the bond market. Both parties are advocating default even as they point the finger at each other.”

Standing at a crossroads where QE2 has ended and the US debt ceiling has been capped.  The road appears blocked at every turn...where do we kick the can next?  With the need to sell even more new debt just to pay off the old debt, and the line at the buy window getting thin, US sovereign debt default and a collapse of the US Dollar would appear imminent.  In a "free market" perhaps that would be the case.  But, in a world where the markets are rigged, the opposite of what is expected is more often the result.

A scenario of US debt default and Dollar collapse is going to come one day soon enough, but it's doubtful that it arrives this summer as expected.  No, the exact opposite is likely to occur first.  The likely near-term collapse in the financial markets is probably going to be in stocks and commodities as they are bludgeoned in an effort to solve the immediate threat to the Treasury Market and the US Dollar.

The immediate threat to the financial markets following the end of QE2 is not to the Treasury Market, but to the stock market.  It is no longer a secret that the money being printed by the Fed to purchase US Treasury debt from the Primary Lenders has been leveraged by those same banks to "levitate" the stock markets to give the "appearance" to the public that the "Fed has everything under control".

12 April 2011 by Cullen Roche
...margin debt has tended to correlate fairly closely with the direction of the equity market. And according to the latest data from the NYSE, margin debt continues to move higher. In an effort to ride the coattails of the Fed and QE2′s “can’t lose” environment, investors have dipped into their borrowings to buy equities. David Rosenberg highlights the speculative fervor that this now represents. Current levels of margin debt are now consistent with the Nasdaq bubble and just shy of the levels seen before the credit crisis (via Gluskin Sheff):

“If there is one sure way to tell that the Fed has managed to create and nurture a speculative-led rally in the equity market, look no further than what is happening to investor-based leverage growth – it’s exploding off the page. Yes, that’s right. Debit balances at margin accounts skyrocketed $20.7 billion in February. Only two other times historically have we seen leverage rise so much so fast and both times it was during a manic phase – during the tech bubble of the late 1990s and the credit bubble just a short four years ago.

To put that $20.7 billion incremental leverage in on month into proper perspective, it represents a 7.2% jump, or an increase of no less than 129% at an annual rate. And, it’s not just February – the rising use of credit to buy stocks has zoomed ahead at a 64% annual rate in the past three months. If and when the markets breaks, the problem in trying to contain the downside momentum is that there are no short left to cover, which actually helps as a shock absorber. The Fed has successfully cleaned out the short community, and the extent to which we see margins being called away may very well accentuate and downside pressure…if it should come.”

The results from QE2 are beginning to look fairly clear. Not only does this program appear to have done very little to help the real economy, but it appears to have sparked a speculative move in risk assets that creates a disturbing level of instability.

The Fed has in effect created a financing pyramid, a massive Ponzi Scheme, in an effort to delude the public into believing that there must be an economic recovery because stocks have been rising for the past two years.  Unfortunately for our bumbling Fed chairman, AND THE AMERICAN PUBLIC, this is absolute bullsh*t!  The equity markets are a very poor barometer of economic health AND wealth, but in the "CONfidence game" that the Fed is running, the public is brainwashed by the financial media into the belief that rising stocks equal a strong, growing economy.  With first quarter GDP coming in at a meager 1.8%, where is this strong, growing economy?

Today, stock prices are simply a reflection of leverage rather than an inflation of the money supply.  The money the banks have received for the Fed's Treasury purchases remain bottled up in their excess reserve accounts at the Fed.  Today, stock prices are just one more layer of a still growing debt bubble.

With this leverage financial pyramid in place, it is now easy to accept Bumbling Ben's repeatedly confident declaration that current commodity inflation is "transitory".  With his Ponzi Scheme in place the economy is disrupted and left stuck in the mud, held hostage by the casino games being played on Wall Street as paper profits change hands repeatedly, but with no net wealth created to support an economic recovery.

Ben and his Fed Head brothers are in control all right, but they are not in control much more than the rigging of these markets to meet their needs.  And their immediate need is a source of funds to purchase more US Treasury debt since their QE2 spigot is about to run dry.  An over leveraged stock market that begins to fall rapidly would certainly offer a quick source of Treasury Debt funding.  All signs are now pointing to an imminent take down of the equity markets to finance the Treasury's exploding debt needs.

“The U.S. economy is not in recovery, and what ever upside bouncing there was in retail sales and industrial production increasingly appears to have been transient in nature. In this morning’s (May 17th) reporting, April 2011 housing starts continued their broad downtrend, bouncing downhill in renewed deterioration. More important than the statistically-insignificant monthly decline of 10.6%, the annual decline of 23.9% was significant, and the six-month moving-average has declined for the last three months, pushing the historic low level seen in April 2009…

In tandem with last week’s reporting of retail sales activity gaining less than 0.1%, net of higher prices (see Commentary No. 368), production activity appears to have stalled, with housing and consumer liquidity issues leading general economic activity into what eventually should be recognized as a double-dip recession…

April Housing Starts Were Consistent with a Deteriorating Economy.”

“Commentary No. 369: April Housing Starts, Industrial Production”
John Williams, shadowstats.com, 5/17/11

QE2 has not supported an economic recovery but instead has resulted in piling more debt on unpayable Debt.  The Fed has been creating $19 Billion out of thin air for free per week to buy U.S. Treasuries on which Taxpayers must pay interest.

QE2 has supported a bad habit.  Unfortunately, like a drug addict, the stock markets and economy have come to rely on QE for their sustenance and highs.  Withdraw the QE, and the economy and the stock markets will crash.  The perfect scenario for a debt market short on funding.

Where does money fleeing a falling stock market always seek "safety"?  The US Treasury market!  Of course, it's all becoming so clear now. 

Will QE2 end in fire or ice?
By Jim Saft
With just a month to go until the Federal Reserve brings QE2 to a close, most analysts are focused on the risks to markets if interest rates shoot higher when the government is no longer buying its own debt.

But an alternative is worth considering: what if this buying binge by the Fed is followed not by that fire but by the ice of sinking yields and another lurch towards deflation.

Albert Edwards, a trenchantly bearish strategist at Societe Generale, maintains that Treasury yields are heading lower and that this will be accompanied by the mother of all busts on the stock market, taking the S&P 500, currently at about 1,325 points, to 400.

Yes, that’s right, 400.

“Despite fully acknowledging the ruination of the government balance sheets as years of excess private sector debt are transferred to the public sector, we still expect to suffer another deflationary bust that will take government bond yields to new lows before government profligacy and the Feds’ printing presses take us back to both double-digit inflation and bond yields,” Edwards said in a note to clients. “For now, we remain heavily overweight government bonds.”

The more mainstream concern is that the ending of the second round of quantitative easing will remove a key support for Treasuries and that few will be willing to buy when the Fed is not, especially given the uncertain outlook for the budget and inflationary pressure from commodities and energy.

At the same time QE2 is ending, Chinese and emerging market tightening may mean less natural appetite for Treasuries. If China decides to allow its yuan to strengthen to fight inflation, this will be exacerbated. China must buy Treasuries to recycle export dollars and keep its currency cheap. If China decides to ease up on that policy there will be fewer Treasuries purchased.

Edwards thinks, though, that this will be swamped by weak economic fundamentals and a sell-off in risk assets. Both of these forces would send Treasuries higher, even despite the absence, at least temporarily, of the Fed as a big buyer of government debt.

So, in this scenario, the money that was displaced by the Fed during QE2, money that poured into risk assets, particularly bonds, comes flooding back to Treasuries, driven by fear of an economic downturn and seeking safety from carnage in the corporate markets.

Gold and Silver might be "safer" bets than US Treasury Debt, but the demand for Treasury Debt created by a stock market take down will also create a demand for US Dollars.  A rising US Dollar will pressure the Precious Metals lower along with stocks much to the Fed's pleasure. 

The perceived demand for Treasury Debt will buy time for the US Congress locked in battle over the raising of the debt ceiling as QE2 expires June 30, 2011, but very little.  The take down in the stock markets will be fast and furious.  It's intent to scare the public into demanding more of the drug that keeps the economy afloat and stock prices high will be a great success for our financial puppet masters at the Fed.

If this scenario plays out as we move into the summer months, and falling stock prices begin to peg the "fear meter" of investors, cries for the Fed to "do something" will be loud and come from all corners.  This will set the stage for Congress to raise the debt ceiling, and open the door to the Fed's QE3 program.  Timmy Geithner's August 2, 2011 Treasury Debt Default deadline looms as a panacea for an economy strung out on the cold turkey of a QE free economy.

With gold trading higher along with silver, the Godfather of newsletter writers Richard Russell had this to say in his latest commentary, “Russell Looks ahead -- With inflation heating up as far as American consumers are concerned, the pressure is on the Bernanke Fed to "cool it" on its quantitative easing. I think the stock market (now slumping) and the dollar (now rising) are reflecting this. Thus the Fed might be setting off a temporary slump in the summer economy.

If so, Bernanke could announce, "See, if we ease up, the economy eases up as well." All of which strengthens the case for QE3. Of course, President Obama would love a late pick-up in the US economy as the nation moves into the 2012 election period.”

Russell continues:

“So the Russell crystal ball says, "Prepare for the summer doldrums (maybe even a slump), and then be ready for an economic revival in the fall and into 2012. Also get ready for all-out inflation as the Fed steps on the QE3 accelerator in late 2011.

Today's hope that another Greek bailout will "fix things" is just more wishful thinking, as the reality of the false economic recovery being sold to Americans sets in as Consumer Confidence Falls Unexpectedly in May.

The table has been set by the Fed.  The immediate funding needs of the Treasury Market far outweigh the needs of the Stock Markets.  The fix is in.  It's cold turkey for stocks, commodities, and the economy, and a good buzz for US Treasuries.  Prepare yourselves for a living hell.  Summer begins June 21.

1 comment:

  1. Very informative articles. I see a big crash happening in equities as well. The combination of a worthless US dollar and this last run up in oil and gas prices is what is crippling our economy. All this new inflation created by the FED has made the commoner's disposable income vaporize into thin air. Prices go up and people quit spending money, which then hurts businesses and crushes their earnings, which in turn makes investors want to sell their stock.

    The price of commodities (like oil and food) can not shoot to the moon without eventually wreaking complete havoc in the equities market later on.