[Update: August 2nd, 2012]: A Bit Of The Old In And Out
Apparently Draghi was bluffing after all...So, as one would expect, the markets are having a temper tantrum, because they didn't get any free money from either the Fed or the ECB this go around. It appears that Wall Street's candy shop is closed until the catch 22 of further economic/market weakness comes into play...Which sets up an interesting next few weeks, given that Wall Street is already imploding under the weight of its own greed, per the prior post below...
[Original Post: July 27th, 2012]
Mario Draghi, head of the European Central Bank moved the markets big time yesterday (and today), when he said:
"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro...And believe me, it will be enough.”
The market is ramping because it believes that the ECB will soon become buyer of last resort for Spanish and Italian bonds in the open market. If so, it also means that European policy-makers are playing the last card they have left i.e. debt monetization (the last card, short of Germany annexing half of Europe). However, just as debt monetization (aka. QE) here in the U.S. is not having any effect on the underlying economy, as evidenced by today's GDP report, so too in Europe will debt monetization fail to make its way into the underlying economy. Therefore, once again, policy-makers are assuming that via trickle down economics, if they shower enough printed money on wealthy lenders then eventually a few drops will sprinkle onto the dwindling middle class, before it turns to dust and blows away.
The Point of Recognition is Inevitable
All debt monetization does is drive a larger disconnect between stock prices and economic reality - a wedge that will eventually be resolved in the direction of reality i.e. down. In the interim, the copious time and money wasted on prolonging that day of reckoning will only enlarge the crater resulting from the 'convergence' between fantasy and reality. Several bellwether companies (Cummins, McDonald's, Apple, Starbucks, UPS) recently reported disappointing earnings which indicated that the global economy is slowing. Meanwhile the leading large cap stocks breaking out to new highs lately are largely recession plays (Altria, Colgate, Kimberly Clark). Similarly, as I showed recently, Walmart has gone parabolic, and the last time that happened was the week Lehman collapsed in 2008. Just Sayin'...
The chart below shows, how in their futile bid to forestall sovereign default, central banks are pushing risk assets higher in the face of a global recession. This will be the first recession in U.S. history that the stock market did not discount ahead of time. Central banks can influence asset prices at the margin, but they can't offset wholesale asset reallocations brought about by recession.
The Point of Recognition is Inevitable
All debt monetization does is drive a larger disconnect between stock prices and economic reality - a wedge that will eventually be resolved in the direction of reality i.e. down. In the interim, the copious time and money wasted on prolonging that day of reckoning will only enlarge the crater resulting from the 'convergence' between fantasy and reality. Several bellwether companies (Cummins, McDonald's, Apple, Starbucks, UPS) recently reported disappointing earnings which indicated that the global economy is slowing. Meanwhile the leading large cap stocks breaking out to new highs lately are largely recession plays (Altria, Colgate, Kimberly Clark). Similarly, as I showed recently, Walmart has gone parabolic, and the last time that happened was the week Lehman collapsed in 2008. Just Sayin'...
The chart below shows, how in their futile bid to forestall sovereign default, central banks are pushing risk assets higher in the face of a global recession. This will be the first recession in U.S. history that the stock market did not discount ahead of time. Central banks can influence asset prices at the margin, but they can't offset wholesale asset reallocations brought about by recession.
