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.

Monday, February 20, 2012

Credit Collapse Is Inevitable

While watching Bloomberg Asia this evening, I realized that every other message on the news ticker bore some connection to the impending (2nd) Greece bailout.

"Gold, stocks may fall once Greece deal approved"
"Bombay stock futures fluctuate ahead of Greece deal"
"U.S. stock futures up on word of pending deal" (I know, somewhat contradicts the first headline above)
"Soybean futures volatile ahead of Greece deal"

You get the idea.  With headlines like that, anyone who doesn't acknowledge the breadth and interconnectivity of the global Ponzi economy, is in major denial.  Greece is a country of a mere 11 million people out of 6.8 billion, yet the solvency of just that one tiny country is literally driving global asset price fluctuations, valued in the trillions of dollars.  And the primary reason for that power is leverage.  The globalized system is now so leveraged from Central Bank liquidity injections (QE1, QE2, ECB LTRO, Chinese RRR etc.) that small fluctuations and repricing in the nether regions of the global risk markets can cause massive, outsized reverberations across the entire globe.  Imagine, a global financial system that now requires the ongoing fiscal prudence of the Greeks, in order to maintain its stability!!!  (no offense to any Greeks, but that's a lot of responsibility).

In a liquidity driven environment, disconnected from underlying fundamentals, all asset correlations move to 1:1 and asset allocation decisions become binary:  Risk on.  Risk off.

And the real problem therefore is that Greece is not alone.  Greece is just one of dozens of countries globally that has borrowed itself beyond the point of no return (including the U.S. which is somewhere along that line).  Meanwhile, the fiscal cut backs (austerity measures) being forced on Greece make default absolutely inevitable, by exacerbating the economic downturn and reducing tax revenues.  (Not to say that there is any long-term option, other than default).  So Greece is only the first domino in a long series.  Once that domino holds or falls, the markets will rush towards the next domino (Italy? Portugal? Spain? Hungary?) and await the fate of that country's bail out.  Like a gun pointing at the head of the entire financial system.

Therefore, if global asset markets valued in the trillions of dollars are now so fragile as to be heavily influenced by some of the smallest and least fiscally prudent nations on the planet, then we have truly reached a stage where it won't take much more than for a butterfly to flap its wings in <Insert Country Here> to set off a global credit run.

Friday, February 17, 2012


Some may be wondering if I am reconsidering my overall doom and gloom stance given the spate of recent good news.

No chance.  Recent events and the crowd's group think bullish/denialistic interpretation thereof, have me only further emboldened.

First the (perceived) "Good news":

1) U.S. economic recovery perceived to be picking up steam
2) DOW back at the highest level since 2008
3) European issues, seemingly resolved for the moment
4) Occupy Wall Streeters settled down for a long winter's nap

1) Economy:
First, this can't possibly be considered a sustainable recovery from a debt crisis, when we are adding ever more debt to the pile to sustain that illusion.  This time, instead of consumer debt it's Federal government debt, but it's still money we are borrowing  from the future to pretend that we are wealthy today.

Suffice, to say that if policy-makers since World War II had been willing to borrow as much money (10% of GDP/year) as the current crop of clueless buffoons, then there would have been no recessions in the past 60 years !  Think about that, we could have just papered over every single recession with massive government borrowing and pretended they never happened.  So, any notion that the 2008 recession ever ended is complete denialism.  Believing that the U.S. will be the first nation in history to borrow its way to prosperity is a fool's errand of the highest order.

Meanwhile, on the jobs front, there are still 5.6 million fewer jobs today than there were in 2008, in the face of ongoing population growth.  Only an economist would say we are in a recovery when the average family is worse off now than it was 4 years ago.  

2) Stock Market:
This has been a purely liquidity driven market since 2009.  It's like a race car on nitrous oxide -  good for a few seconds and then it blows the engine.  First QE1 powered the market, then it was QE2 and now it's the ECB's "bazooka". All of these Fed/ECB programs are just central banks adding trillions of dollars and Euros of liquidity into the markets by buying government bonds.  This in turn drives down interest rates and sets off a global "hunt for yield" aka. rally in stocks and other risk assets.  It's a temporary illusion driven by liquidity but not supported by solvency.  Case in point, these Greek "bailouts" will do nothing to improve solvency.  The German government lends the Greek government ~100b euros and forces the Greeks to cut spending.  The Greek Gov't then turns around and uses the money to repay German banks on existing loans.  All the while, the Greek people are now on the hook for another 100b euros and their economy is spiraling into the abyss as the paradox of thrift takes a death grip on their economy.  The only ones being bailed out are the German and other European lenders.

Exhibit A: Effect of Fed/ECB on stock prices

Exhibit B: Apple - the bellwether stock of our time.
As you can see below, this past two weeks, Apple's stock went parabolic and surpassed $500/share and the half trillion market cap mark.  The last technology stock to surpass the half trillion mark was Cisco in March 2000.  I remember it well, because it occurred within days of the all time high in the Nasdaq.  It's not to say that there is anything magical about 500 billion market cap, but Apple's vertical stock price and the valuation accorded to the pending Facebook IPO (100x earnings) are harking back to the lunacy of the Dot Com era.  No thanks.  Been there.  Done that.

3) Europe Resolved

As I said above, "Extend and Pretend" are the order of the day.  The Exhibit A chart above shows the ECB just juiced the market to buy itself some time.  The only question on the table is how long will this rally last?

4) Occupy Wall Street settled down for a long winter's nap

Spring is around the corner...