Tuesday, January 26, 2016

The Markets Are Telling Us There's A Severe Issue Out There.....IS ANYONE REALLY PAYING ATTENTION!

The Markets Are Telling Us There's A Severe Issue Out There

There is a lot more market turmoil to come and there is no easy way out of the Fed's insane zero interest rate policy.

Every time the financial markets get volatile and messy like this it deserves our full attention because the markets are trying to tell us that there is a severe issue out there. It's been coming from all over the globe: We have a collapse in commodity prices and we have financial markets across the globe selling off, including in the United States.

The heavy-handedness of central planning is going to be a lot harder to get rid of than people think. We don't know how dependent markets are on central bank policy until they start to reverse it. And now, as the Fed starts to reverse it, we're finding out that it's a bigger problem than most thought.

Most economists will tell you that the US economy is okay and everything looks good. That is correct if you take a view backwards. But the market is telling you that from this moment forward things are maybe not as good as we think they are. Forward looking measures are not that good and one of the best forward looking measures are earnings which are terrible right now. 

So the question is: Is the marketplace telling us that going forward from here we should expect a different type of economy? The low interest rates on treasury bonds, the falling expectations for inflation that the tips market is showing us and the volatility in the stock markets makes me believe that the answer is yes. We should expect something different.

The Fed wanted to get out of the market manipulation game. They knew that QE didn't work anymore for the economy. It just served to push up stocks and they didn't want to be in that game. So a month ago they raised rates and they promised us that they were going to raise rates four times this year according to the dot chart. But nobody else believes that they are going to move four times. So the Fed has a very difficult choice in front of them: Do they cave to market expectations and then be forever branded as being reactionary to the financial markets. Or do they stick to their guns and then be branded as the people that caused undue market stress. There is no win in this situation. They don't even know which way they are going to go on this.

Most of the worlds stock markets are down more than 20% which is the general definition of a bear market. I suspect that in the first half of this year the S&P 500 will get to at least that level if not beyond it.

Capitalism has always been an epic struggle between risk and reward, and the easiest way to understand the present turmoil in world stock markets is to recognize that the two have reversed. Risk has gone up, and reward has come down. Investors have reacted by selling. Fear triumphs over greed. This, of course, increases risk and selling. It's an old story.

The global stock sell-off may reflect gloomy prospects for "emerging-market" economies. These are middle-income countries: China, Brazil, Russia, Mexico, Indonesia, India and the like. Together, they represent nearly half the world economy and, until recently, were expected to power global growth. Now, many (not just China) are struggling with stubborn problems. With hindsight, their previous rapid growth depended heavily on a fleeting commodities boom and unsustainable borrowing.

If this theory is correct, then the worldwide sell-off of stocks represents a logical response to reduced economic prospects. (In theory at least, stock prices reflect today's value of future profits.) Unfortunately, two bits of evidence support this theory.

One is oil. Since mid-2014, its price has dived from more than $100 a barrel to below $30. Traditionally, lower prices have been seen as a boon. Consumers' savings at the pump can bolster other spending. But this time, lower prices are also blamed for spreading distress and dragging stock markets down. Why is this? Low oil prices don't just reflect oversupply. They also result from soft demand. Because increased demand comes heavily from emerging-market nations, they may be weaker than assumed. Oil may be the canary in the mine.

The other bit of evidence involves "capital flows" - movements of money in and out of countries. For years, emerging-market countries attracted billions of inflows, based on appealing profit opportunities. But in 2014 and 2015, emerging-market countries experienced $846 billion of net outflows, estimates the Institute of International Finance (IIF), an industry group. This capital flight has many complex causes, but one is worry over emerging markets' "growth performance and corporate indebtedness," says the IIF.

Investors are fleeing emerging-market stocks and bonds for fear that stocks will fall and bonds won't be repaid. Already, their stocks are depressed. From previous peaks, stocks are down about 80 percent in Brazil and Russia, 50 percent in China and 40 percent in India and Mexico, according to data from the IIF.

The stock slump could be self-fulfilling and lead to a very negative vicious cycle. The Great Recession was a traumatizing event. Because it was so deep and unexpected, it made both consumers and business managers more risk-averse. With risks now rising and rewards falling, firms and households might cut their spending just a bit - and cause the very slump we are trying to avoid.

When a central bank buys equities, it doesn't have teams of analysts running valuation studies and creating model portfolios. It just makes across-the-board purchases, which tends to float all boats. So the wheat doesn't get separated from the chaff and capital has no idea where to flow. Malinvestment becomes rampant and the result is, well, what we have today, an over valued market, to much debt and few solutions. 

Critics of today's fiat currency/fractional reserve banking world have (for what seems like forever) made the common sense point that when debt rises faster than cash flow, bad things are bound to happen. In every cycle since 1980 this has been dismissed by the vast majority who benefit from inflating bubbles - until the bubble bursts. And here we go again.

Getting to the ultimate bottom is going to take "a lot more time" and price deterioration, genuine bear markets tend to last from 18 to 36 months.

QE no longer works: "it is difficult to push the prices of these over valued assets up and it is easy for them to fall. And when they fall, there is a negative impact on economic growth. When debt levels cannot be increased without reducing spending — stimulating demand is more difficult.

What is currently transpiring in the markets today is exactly what the "everything is awesome" crowd stated wouldn't happen – and exactly what many others argued – was inevitable. And, suddenly it is they who are finding out the rarefied air of "brilliance" The Fed enabled them to breathe has indeed been shut off – and all that's left to inhale is their own exhaust fumes.

After the white-knuckle sell-off of global equities that was finally punctuated by a rally late last week, everyone wants to know: Was this the bottom for stocks? And now Moody's weighs in with an unwelcome warning... "it's hard to imagine why the equity market will steady if the US high-yield bond spread remains wider than 800 basis point."

In addition the world has yet to fully digest what is currently happening in Japan.

Japan is the global leader for Keynesian Central Banking insanity. The ECB and US Federal Reserve began implementing ZIRP and QE after 2008. The Bank of Japan has been employing both ZIRP and QE since 2001. Put simply, by the time the Great Crisis of 2008 rolled around, the Bank of Japan had nearly a decade's experience seeing what QE, ZIRP, and the like could or could not accomplish.

On top of this, the Bank of Japan has been the single most aggressive Central Bank post-2008. In 2013, it launched a single QE program equal to roughly 25% of Japan's GDP (the Fed's largest program was less than 10% of GDP). As if this wasn't insane enough, the Bank of Japan then expanded the program, not because it was working, but because doing so would result in its models appearing more accurate. In short, the Bank of Japan crossed the Rubicon long ago as far as monetary insanity goes.

Which is why it's critical to note two things:

1)   The Head of the Bank of Japan, Haruhiko Kuroda has admitted Japan's "potential" GDP growth is 0.5% or less.

This is an implicit admission that QE doesn't generate GDP growth. Anyone who's studied QE knew this already, but it's an incredible admission from a Central Banker. These are the people responsible for instilling confidence in the system.

2)   The Bank of Japan just boosted its ETF purchases but not its bond purchases in response to Japan re-entering a recession.

The illusion that QE is anything other than a market prop is over. The BoJ has admitted QE doesn't generate economic growth. This is confirmed by the fact that it only boosted the stock related component of its current QE program, NOT the bond-buying component.

Mind you, this is AFTER Japan entered a recession, which only gives credence to Kuroda's admission that QE cannot generate GDP growth.

However, the big news is that despite the boost in ETF purchases, Japan's Nikkei has collapsed, taking out the bull market trendline running back to the first hint of Abenomics back in late-2012. In short, not only has the Bank of Japan admitted QE is not a successful tool for boosting GDP, but we've reached the point at which even increases in QE are no longer having the desired effect.  

The markets have yet to digest this, but when they do, it's going to be one heck of a show.  !!!!!

The Ultimate "Truth Bomb" - The East Knows The West Is Bankrupt

Russia and China know full well the situation in the West. It is a bankruptcy waiting to happen as everything is fractional reserve and running on maximum margin while the underlying system is shrinking and no longer supplying enough liquidity. The stage is truly set for a financial attack on anything and everything American.

Western markets are a fraud and our enemies / competitors understand this better than we do. Our Treasury market is one where the biggest buyer is "our self" …the Fed and the ESF.

The stage is already set. The East knows the West is bankrupt. They know we have no gold left because they have it! They can see the finances of the various cities, states and federal government. They know the situation in derivatives is one giant mountain of dynamite waiting for a spark. They know our rule of law is gone and bail ins of depositor funds is next. We are monetizing their sales of Treasury securities. We are fooling no one except ourselves.  !!!!!

What a tangled web the global geopolitical situation has become. Geopolitics and finance have always been interrelated but recently much more so.

Nearly ALL of what we are seeing is centered by and on the "petrodollar".  Will it survive or be replaced?  It is no longer "if", but "when" and by "what" will it be replaced with?

Everyone knows we are broke, yet ask anyone and the odds highly favor you will hear "the government will never let it happen".  

Even if you are silly enough to believe this you must ask yourself, what are the ramifications when markets become "make believe"?

America is on the precipice of a new and historic phase of economic and political upheaval called the "Fourth Revolution."

We have had three prior turning points in our nation's history: Jefferson's "Revolution of 1800," which created popular political parties as we know them, the Civil War and the New Deal.

Between our dangerously unsustainable debt and the raw emotions of voters so evident in their passion for their respective candidates, we are  in the midst of the next revolution.

The current political cycle reveals that many Americans are demanding accountability from their elected leaders concerning wasteful spending and policies that have labeled our nation as a third world debtor and welfare state.

A growing majority of citizens want economic growth, job creation, national security and many insist on an end to policies of political correctness that prevent the education of our citizenry and, as they believe, the 
unraveling of 
our basic right of freedom of speech.

Of equal concern are the prospects of ongoing terrorist acts against our nation and our allies, the unimaginable threat of a nuclear 9/11 or the global upheaval from a bankrupt America triggered by a default on our nation's unsupportable $19 trillion national debt.

In stark but simple terms, unless Americans are made aware of this financial crisis and demand accountability, the very fabric of our society will be destroyed. Interest rates and interest costs will soar and government revenues will be devoured by interest on the national debt. Left unchecked, this destructive deficit-debt cycle will leave the White House and Congress with either having to default on the national debt or instruct the Treasury to run the printing presses into a policy of hyperinflation.

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