Best of the Week
Most Popular
1.Canada Real Estate Bubble - Harry_Dent
2.UK House Prices ‘On Brink’ Of Massive 40% Collapse - GoldCore
3.Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - Nadeem_Walayat
4.Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - Marc_Horn
5.5 Maps That Explain The Modern Middle East - GEORGE FRIEDMAN
6.Gold Back With A Vengeance As Bitcoin Bubble Bursts - OilPrice_Com
7.Gold Summer Doldrums - Zeal_LLC
8.Crude Oil Trade & Nasdaq QQQ Update - Plunger
9.Gold And Silver – Why No Rally? Lies, Lies, And More Lies - Michael_Noonan
10.UK Election 2017 Disaster, Fake BrExit Chaos, Forecasting Lessons for Next Time - Nadeem_Walayat
Last 7 days
UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - 22nd Jul 17
Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts - 22nd Jul 17
Warning: The Fed Is Preparing to Crash the Financial System Again - 21st Jul 17
Gold / Silver Shorts Extreme - 21st Jul 17
GBP/USD Bearish Factors - 21st Jul 17
Gold Hedges Against Currency Devaluation and Cost Of Fuel, Food, Beer and Housing - 21st Jul 17
Is It Worth Investing in Palladium? - 21st Jul 17
UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - 21st Jul 17
The Fed May Show Trump No Love - 20th Jul 17
The 3 Best Asset Classes To Brace Your Portfolio For The Next Financial Crisis - 20th Jul 17
Gold Stocks and Bonds - Preparing for THE Bottom - 20th Jul 17
Millennials Can Punt On Bitcoin, Own Safe Haven Gold For Long Term - 20th Jul 17
Trump Has Found A Loophole To Rewrite Trade Agreements Without Anyone’s Permission - 20th Jul 17
Basic Materials and Commodities Analysis and Trend Forecasts - 20th Jul 17
Bitcoin PullBack Is Over (For Now): Cryptocurrencies Gain Nearly A 50% In Last 48 Hours - 19th Jul 17
AAPL's 6% June slide - When Prices Are Falling, TWO Numbers Matter Most - 19th Jul 17
Discover Why A Major American Revolution Is Brewing - 19th Jul 17
iGaming – Stock Prices - 19th Jul 17
The Socionomic Theory of Finance By Robert Prechter - Book Review - 18th Jul 17
Ethereum Versus Bitcoin – Which Cryptocurrency Will Win The War? - 18th Jul 17
Accepting a Society of Government Tyranny - 18th Jul 17
Gold Cheaper Than Buying Greek Villas in 2012 - 18th Jul 17
Why & How to Hedge the Growing Risks of Holding Stocks - 18th Jul 17
Relocation: Everything You Need to do for a Smooth Transition Abroad - 17th Jul 17
A Former Lehman Brothers Trader: It’s Time To Buy Brick And Mortar Retailers - 17th Jul 17
Bank Of England Warns “Bigger Systemic Risk” Now Than 2008 - 17th Jul 17
Bitcoin Price “Deja Vu” Corrective Sequence - 17th Jul 17
Charting New Low in Speculation in Gold and Silver Markets - 17th Jul 17
Bitcoin Crash - Is This The End of Cryptocurrencies? - 17th Jul 17
The Fed's Inflation Nightmare Scenario - 17th Jul 17
Billionaire Investors Backing A Marijuana Boom In 2017 - 17th Jul 17
Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - 17th Jul 17
Gold and Silver Biggest Opportunity Since Late 2015, Last Chance at These Prices - 17th Jul 17
Stock Market More to Go - 17th Jul 17
Emerging Markets & Basic Materials Stocks Breaking Out Together - 16th Jul 17
Stock Market SPX Uptrending Again After Microscopic Correction - 15th Jul 17
Global Currency Reserve At Risk - 14th Jul 17
Picking Great Gold Stocks - 14th Jul 17
BBC Tree Expert's Verdict on Sheffield Amey / Labour City Council Tree Felling's - 14th Jul 17
SPX Cycles, Fed Funds and Gold - 14th Jul 17
Should Platinum Be More Expensive Than Gold? - 14th Jul 17
What's Next for US Dollar, Stocks, Bonds and Gold? - 13th Jul 17
India Gold Imports Surge To 5 Year High – 220 Tons In May Alone - 13th Jul 17
Gold and Silver: Your Stomach Is Probably Wrenching Right Now - 13th Jul 17
Gold Industry Is In A Deep State Of Dysfunction, Delusion And Denial - 13th Jul 17

Market Oracle FREE Newsletter

Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts

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.


© 2005-2017 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

Catching a Falling Financial Knife