Friday, February 24, 2012

Hotel California

Excellent article on ZeroHedge regarding the total amount of liquidity added to the markets just in the past 3 months.  Once one adds in the effects of earlier Central Bank monetizations, the total figure is $7 trillion of newly printed money having levitated the markets!  And everyone thinks that the markets are going up because the economy is getting better.  The economy is not getting better.  The U.S. government is borrowing 10% of annual gdp to obtain a 2% growth rate !  Yet the Idiocracy at large, which can no longer do basic math, has bought into the fantasy.  From economists, to the media, to the general public - no one questions this strategy.  Borrowing 10% of income to grow the economy by 2% - where the hell did the other 8% go?  It went to pay for a way of life that is no longer (never was) sustainable. It's also being used to get Obama re-elected, by supporting the illusion formerly-known-as-the-economy for yet one more year.   But don't worry, because Mitt Romney says he will cut taxes even further, because apparently paying for 2/3 of the Federal Government (borrowing the rest) is too much for taxpayers.  You can't make this shit up.

And there is only one reason why all of this new money has not caused a wage price spiral and or hyperinflation a la 1970s - because the money is being given to large investors and lenders exclusively, not the borrowers.  Had any of this money found its way into the hands of borrowers it would have reduced debt burdens and freed up income to be spent in the real economy.  Instead, the Central Bankers decided that the only acceptable form of inflation is asset price inflation for the wealthy elite, not wage inflation for the average wage earner.

So, as I have shown previously, the net effect is the juicing of every risk asset market under the sun - stocks, all types of bonds, commodities.  A few pictures are worth a thousand words:

Nasdaq 100

Municipal Bonds

Alas, apparently these Ph.D Central Bankers have no real world knowledge of supply and demand or even basic economics.  Because by inflating these asset values far beyond what the underlying fundamentals will support, they have driven all natural buyers out of the market.  It's a well known fact that stock market volumes these past 3 years have been declining at a steady rate.  This is because the natural buyer of assets can't find value in a world where asset prices are inflated and hence asset yields have been minimized.  Just today, the NYSE recorded its lowest non-holiday volume in 10 years !  

Also unfortunately, and as will become soon apparent, most of that $7 trillion is already in the market and while the Central Banks has been recently the marginal buyer of assets, their collective firepower is still miniscule when compared to the overall size of the total markets.  They are the proverbial tail wagging the dog.  So not only have they driven $7 trillion of highly leveraged hot money into the markets requiring stable if not ever-higher asset values, they have provided absolutely no exit strategy whatsoever.  There is no natural buyer at these level of asset prices but yet there are multitudes of potentially highly motivated sellers if and when perceptions towards risk turn conservative - which can happen at any time.  That is the one parameter that Central Bank's do not control - the crowd's sentiment towards risk, which can turn on a dime.  And when sentiment turns in a pervasive way, it will cause immediate wholesale reallocation of assets on a scale that dwarfs Central Bank liquidity programs.  Everyone trying to sell, but with no one left to buy.

This is the biggest Pump and Dump in human history.