Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Pretium - Canadian Golden Elephant - 31st Oct 14
What USA Today Got Wrong About the Stock Market Fear Gauge - 31st Oct 14
Election Result - Labour Wins South Yorkshire Police and Crime Commissioner - 31st Oct 14
Gold Price Falls, Stocks Record Highs as Japan Goes ‘Weimar’ - 31st Oct 14
EUR/USD - Double Bottom Or New Lows? - 31st Oct 14
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

2011, Another Year of Living Dangerously

Stock-Markets / Financial Markets 2011 Jan 13, 2011 - 10:41 AM GMT

By: Brady_Willett

Stock-Markets

Best Financial Markets Analysis ArticleIf the crisis has a single lesson, it is that the too-big-to-fail problem must be solved” Ben Bernanke. September 2, 1010

“It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms. If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation.” Ben Bernanke. March 20, 2010


Unconscionable or not, the statistics released by the Fed in December speak for themselves: $3.3 trillion (at its peak) in emergency lending to primarily large financial firms. As for Mr. Bernanke’s March 2010 epiphany, at the same time he was decrying ‘too-big-to-fail’ the Fed’s emergency TAF program was dolling out more than $3.5 billion to U.S. banks and the Fed’s emergency TALF scheme was kicking out billions more to numerous LLC’s.  Remember, these and other activities were taking place when the Fed was supposedly focused on an exit strategy (from unprecedented monetary interventions), and Bernanke was giving a speech entitled “The Economics of Happiness”. In this speech Mr. Bernanke claimed, rather prematurely, that with regards to the 1930s, the ‘lesson has been learned”.

Suffice to say, the only lesson that has been learned/confirmed is that Bernanke and company have no intentions of ever seriously dealing with the overly interconnected, overly complex, and moral hazard laden circus that is the U.S. financial system. Rather, as 2011 begins the Fed is still making massive interventions into supposedly free markets, the Fed’s balance sheet is still chalk full of toxic assets, and Bernanke is still not ruling out the possibility of QE3.  When does the madness stop Mr. Bernanke?  When, if ever, does the Fed get down to the difficult business of busting up a financial system that remains, according to your words, the preeminent threat to America?

Before looking into the crystal ball, one quote from an unlikely source highlights just how reckless and obvious the Federal Reserve’s actions have become:

“When Germany, a country that knows a thing or two about the dangers of inflation, warns us to think again, maybe it's time for Chairman Bernanke to cease and desist. We don't want temporary, artificial economic growth bought at the expense of permanently higher inflation which will erode the value of our incomes and our savings.”

The above quote was spoken by one Sarah Palin…


2011 – An Artificial Recovery Is Still A Recovery

Against the backdrop of minimal job creation and the inability of policy makers to remove any of their extraordinary stimulus measures, Mr. Bernanke actually had the audacity to contend that QE2 was ‘already working’ because it helped raise stock prices. Have we not learned that outsized increases in asset prices are unwelcome - that the booms they engender inexorably lead to gigantic busts?  As for the debt side of the equation, with the U.S. consumer showing only faint signs of increasing their appetite for debt, leading the charge is the U.S. government, which, according to the Treasury, in fiscal 2010 accrued more than $2 trillion in net liabilities. The U.S. government, by all accounts, is set to embark upon more years of unrepentant borrowing.

In other words, not unlike previous episodes of ‘recovery’, today’s U.S. revival is being supported by cheap money, rising asset prices, and staggering increases in debt.  This sorry state of affairs – wherein policy makers are focused solely on short-term growth objectives – comes after decades of dysfunction. Specifically, and as covered in this year’s Wish List (download preview), increases in debt and asset prices beyond gains in wages have produced an insatiable U.S. appetite for imported goods, and this has created a hysterical policy paradox (on the one hand, failing to direct resources at supporting unsustainable consumption would ensure a sharper economic downturn, while on the other efforts to spur short-term consumption is unproductive in that it reduces the focus on strategic investment and saving). A ready example of this predicament can be seen in the trillions already spent trying to stop much needed financial market corrections (which would have negatively impacted short-term consumption and debt accumulation) versus the meager amount ($586 billion) spent by China making things and investing in technology.  Today China is overtaking Japan in R&D spending and trying to slow down its overly successful stimulus activities, while the U.S. is still directing massive resources at trying to fix its broken consumption model.

The hazards of conspicuous consumption noted, the expectation that many unsustainable/artificial drivers of growth will, eventually, spark an increase in jobs remains.  Howl all you want about how ill-guided U.S. policies are, but if the definition of recovery is quarantined to the idea of growth at any cost there is the potential for short-term success.  Quite frankly, given the continued improvement in many of the recent economic statistics and strong advances in many jobs-related stocks, new job creation may be imminent. If so, an extension, albeit unstable, of the ongoing recovery is likely.


This is not to say that the recovery is built to last. After all, remember that all of the 8.1 million U.S. jobs created by rising asset prices and debt from September 2003 to December 2007 quickly vanished during the crisis.

Bears Will Have To Wait!

Along with the improving economic headlines, the problem with being a starving bear is that capital flows and sentiment trends have turned decidedly bullish.  We see these trends in the Investor Intelligence and related surveys and complacent readings in the VIX, but also, more anecdotally, by the fact that Abby Joseph Cohen and company are yelling it’s time to “Get Back Into Stocks!” and a jolly Lawrence Kudlow is interviewing a jolly Donald Luskin. Having watched the 1990s mania unfold and the 2003-2007 ‘recovery’ keep rolling along, these episodes of acute optimism have a way of feeding on themselves, often times for longer than common sense would deem possible.

As for those that take a contrarian bent – since no one is bearish now must be the time to be bearish! – this attitude is definitely warranted insofar as a market correction is concerned.  However, the sentiment may be misplaced if speculating on an immediate bear market.  Quite frankly, in direct contrast to all of the optimism to be found is the fact that equity fund flows have only started to turn positive after more than 7-months of steady outflows.  Will, after months of market gains, the average American play the role of sucker once again and return to U.S. equities en masse? There is this possibility.

Finally, beyond the obvious trends sits another, more layered observation in that the world needs the U.S. more than the U.S. needs the rest of the world. As a quick example, the dysfunctional U.S. dollar can catch safe haven flows regardless of its horrendous fundamentals because the Euro is in a more dire state of dysfunction, because China strictly manages its currency, and because numerous countries do not want the dollar to fall (at least not yet).  The same story holds for U.S. equities, which if being priced solely on earnings valuation or Fed model view, are attractive compared to other parts of the world.

As for the potential obstacles leading into 2011, they include a more widespread Euro-crisis, a blow-up in China, a global bond market meltdown, a municipal bond crisis, another real estate down-leg, inflationary pressures, a dollar crisis, a commercial real estate crisis, wars, etc. With the possible exception of raging commodity prices – which owe part of their resurgence to Bernanke’s printing press – none of these events is likely to derail the U.S. recovery. Rather, the story is that of U.S. policy makers unleashing waves of stimulus, increasingly risk-enamored investors taking to surf, and global policy makers terrified of rocking the boat.  Untenable and dangerous as this situation might seem, unexpected obstacles simply exhume a ‘more of the same!’ response. And while these events may make the next crisis that much larger, they also impart a resolute attitude of recovery that is difficult to ignore. 

In an effort to clarify a very complex condition: the U.S. economy will either continue to recover or the financial markets, U.S. dollar, and U.S. government as we know it will completely collapse.  This all or nothing outlook is what happens when debt, asset prices, and policy ammunition myopically fixes its gaze on short-term GDP advances…

Conclusions

For the moment the world needs the U.S. more than the U.S. needs the rest of the world.  This is what 2011, and beyond, is about.  Only when this fact changes or investors reacquire an aversion to risk will the outlook for continued recovery materially change. 

In this environment the investment alternatives are few, while the opportunity for speculation is strong.  Paying little attention to the latter, the story is that of being extremely selective in equities, weary of mispriced fixed instruments, cognizant of your currency exposures, and maintaining an exposure to precious metals.

As for the dream that one day financial institutions will be stable/strong enough to be broken into smaller pieces, and that these pieces will never again be permitted to hold the Fed and American public ransom, this remains simply a dream.  Another year of living dangerously ensures that further obstacles to meaningful reform will be erected in the shadows, and that another financial crisis is preordained. 

BWillett@fallstreet.com

By Brady Willett
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014