Today the PPT turned the ~ -160 DOW drop into a -25 drop in late trading. What was the good news? Kansas City Fed Manufacturing Index decreased 6 points to 3, nope. GDP revised 0 to 1.9%, nope. GNP revised to from 1.3% to 0.5%, nope. Jobless claims tredning to 400K, nope. Merkel cancels speach, nope. Obamacare passed by nonsensical court, nope. No, the PPT was naked today.
Well, Brian Sack has come and gone but the game show must go on! Its a tired, beaten theme but one day it'll go over like a lead balloon and then look out below!
I guess I missed the good news today. The EU meeting had no details. Consumer Spending is flat and car sales are down even on subprime lending. So PPT-G (G is for Global Team) must have been out there today again.
PPT once again? First manufacturing contraction since July 2009 and yet market, S&P500, goes up?
The characters are going to be very busy folks over the next year or two...
Maybe the answer is that the worse things look..... the more likely that QE3 is coming. We will get inflation.
The Fed Res will at some point in the not too distant future restart their asset buying program(s). But remember, Twist is going on now. They are selling short term instruments and buying long term instruments. This accomplishes multiple objectives at once:
1) Forces long term instrument rates down.
2) Keeps short term rates down.
3) Allows the Fed Gov to sell long term instruments to the Fed Res or its Primary Dealers to fund current operating expenses - the welfare/warfare state. From the Fed Govs point of view you keep the people happy and quiet through the election. The transfer payments just keep on coming. You borrow super cheap and spend and spend and spend...
It will work for a while. The amount of money being injected into the economy is fairly large and there is some inflation as a result. QE1 and especially QE2 triggered a fair amount of inflation in commodities. It takes some time for the higher commodity prices to work their way into the products we buy. Unfortunately, foreign competition has kept labor prices capped or even suppressed them in some industries. Tech would be a good example of this.
Overt direct monitization of the Fed Gov over spending is on the way. I do not see any way around it. In order to balance the Fed Gov budget, Fed Gov spending would have to come in line with revenue. This would require a spending cut of roughly 40%. We would have to cut 40% of social security, medicare, medicaid, agg subsidies, the military, government employees, section 8 housing, the EPA, the IRS, the FDA - you name it - everything. A 40% reduction in Fed Gov spending would reduce GDP by about 8%. It would throw the country into a terrible recession - probably a depression. I can tell you right now with enormous confidence this is not going to happen before the election.
After the election the politicians (dems and repubs) are going to take another look at the situation. They know they numbers just like we do. They are not stupid. They also know that bringing spending in line with revenue is not going to happen any time soon - if ever. As unemployment (people losing jobs making 20 an hour and getting jobs making 10 an hour) rises over the next year and revenue is reduced, the Fed Gov is going to be put into an even more serious situation.
Something big is coming to America. I know there are a lot of people out on the net saying a lot of stuff. Truth is they do not know what is going to happen. Nobody knows. However, there is some data to consider. All through history there have been examples of what is going on right now. They all end badly. Along that path there is the phase of inflation/deflation. Things you own deflate. Things you need to buy inflate. This process has already started in America. We are already on the path. At some point there will be an event. It is impossible to predict what that event will be or when it will happen - but it will happen - it always does. That event will cause a loss in confidence in the ability of the Fed Gov to pay back the money it has borrowed. The loss in confidence will spread quickly. Things will happen fast at that point forward.
The good part is the Fed Res and the Fed Gov are committed to extending the current period as long as possible. This gives you time to prepare before the emergency is upon us. Use this time wisely.
Good perspective Dshields.
Regarding Operation Twist:
It would seem that the FED is digging a deeper hole by accumulating lots of long term debt. When interest rates go up......someday, the FED is going to be stuck with lots of worthless long duation paper. I've been doing the opposite .....trying to get into shorter duration bonds to get ready for rising rates.
The FED and Government have a plan to target 6% (+ or -) inflation over the next period of years. At this rate they can devalue the dollar by 50% in about 10 years. That is the only way they can tackle the debt burden without an overnight currency devauation.
I like your analysis that we have inflation in things we buy and deflation in things we own. HOW TRUE! But the trick is to buy things of value like food and survival tools. These things will hold their value and maybe gain.
Europe is the most vulnerable area now. There is no way that they can get 17 countries into fiscal unity. If I was Merkel I'd say adios to the whole bunch and keep my economy strong. Europe is out of control. The Spanish 10 year is on the rise again, just days after the latest intervention.
The powers in control of Europe have such a huge investment in the "experiment" that I'm afraid they will continue to act stupidly. One possible, but by no means certain, outcome of this is the potential return of Gold as a recognized asset. Once the Europeans have borrowed every available pile of money on the continent, they may be FORCED to use gold as collateral for their debt. This could stop bank runs in countries like Italy that have large gold reserves.
We live in extraordinary times. Thanks for your insight.
6% inflation will put America in the poor house in 10 years unless wages keep up. I do not think they will. A combination of foreign competition and a weak labor market has capped US wages. If wages do not keep up with inflation there will be a serious social problem. Also, what happens to interest rates if inflation runs at 6% ? If the market defeats ZIRP and interest rates start to rise the Fed Gov will have a serious problem on its hands.
Your points are well taken, but what alternative does the FED GOV have? Our political structure will not tolerate austerity. No politician will want a deflationary event to occur on thier watch. Therefore they print till they can print no more. ( Inflation is a monetary event) They will be very careful to not kick off a hyper-inflationary event, and so the only course will be to pursue a moderate inflation and hope that the people don't notice. Kind of like boiling a frog. You turn up the heat very slowly and they never know till they die.
According to John Williams of Shadow Stats, We have a much higher inflation right now than is reported in the CPI. He measures inflation the way it was originally measured and not recalibrated every time the FED GOV wants to have better stats.
Bernanke has made it clear that he will not allow deflation. And his actions have been consistent so far.
So to your point....I think America will be in the poor house in 10 years. Actually we are already there.
One more thought. Look at how the Banks are chasing returns way out on the risk curve. First MF Global, then JPM Chase. These guys are not stupid. They realize that they can't make enough profit to survive without placing huge gambling bets. And they are counting on being "too big to fail". These were not isolated problems. The system is too far gone to fix.
We need higher interest rates to start a gradual recovery, and reward the savers, but our debt burden can't be serviced if rates go up even 1%. What a mess.
I am quite familiar with ShadowStats and have a lot of respect for Willams. Williams has it right. I have often thought he would be a good quest writer on this site.
I believe that you are correct about interest rates. ZIRP is punishing savers and the retired who rely on fixed income investments like CDs etc and as they have rolled these over since ZIRP they do not get squat. Retired people who do not have fat pensions or who are not rich are really taking a beating. Market interest rates are very important. When ZIRP was instituted I thought it would be for some limited period of time -- an effort to spur investment into projects that were marginal at the previous interest rates - call it a year of ZIRP. However, what happened was the Fed Gov leaped upon ZIRP as the answer to their borrowing problems. Now it could borrow huge amounts of money to support the welfare/warfare state and not have to pay up for long time - say hello to Operation Twist - ZIRP's evil twin.
The problem is the Fed Gov is going to have to live within its means. This is what they are all trying to avoid because it is going to be very ugly. The class of entitlement honestly believes that the government "owes" it the benefits it receives. In some cases I understand that view - for instance Social Security. The deal was we are going to forcibly extract a fair amount of all your pay your entire life and in return you will receive a defined benefit when you retire. Then the politicians went and spent the money on a ton of different stuff and now we are in trouble. SS disability has become the new unemployment money. When you run out of unemployment and you don't want to get a job then get on disability. This is not going to work either. On the SS site I saw last week where 58% of the money being paid by SS is going to people on SSI or disability - not retired people. This is simply not going to work.
People talk about how great it is that we have 46 million people on SNAP. I think it is terrible and a sign of a very weak nation. People used to believe that hard work, honest dealings, and self sufficiency were the correct path. This is no longer true for a decent sized segment of the population. This very bad and at some point when the Fed Gov is forced to live within its means there is going to be a major social problem - civil unrest is the fancy term.
I think you are right - they are printing and they will continue to print. The other choice is straight default. A straight default would bring chaos as government spending would be brought in line with revenue in short order. This would be a truly horrendous exercise and they would have to deploy the military to the cities to stop the riots and looting. Many people would be forced to leave the cities and where would they go ? We live in a rural area and people here often discuss how to handle the influx of city people when the class of dependency is no longer happy with their transfer payments. These conversations tend toward barricades and guns as the answer. People where I live are armed to the teeth and stock piling ammo. I do not believe that people in cities really understand how the rest of the country lives and what their views are.
The world will sooner or later not want any more dollars as they will not believe that dollar denominated debt is going to be paid back or it will be paid back in dollars not worth having. At that point the Fed Res will either be forced to directly purchase the Fed Govs deficit spending or the Fed Gov will default on its transfer payments. Along that way we will see interest rates rise if we expect the rest of the world to buy our debt. The inflation part is scary. I am not convinced that the Fed Res can control inflation at 6% once that starts. Inflation tends to be a vicious cycle. Things inflate which causes other things to inflate etc.. Looking at the history of other nations there are many examples of where inflation got out of control. I do not believe that wages will inflate at the same rate. This will bring on civil unrest.
Retail sales has now contracted for three months in a row. And the consumer is over 70% of the GDP. Yet the market is only down 30 points after trending towards -100 earlier. Priming the pump for HTF stupidity?
None of it make any sense if you try to look at it the way one might have 10 or 20 years ago. Back then (the good old days) stocks, bonds, commodities, and other stuff appeared to normally work based on what used to be called fundamentals. The fundamentals of the company, industry, sector, business cycle - you know, the fundamentals. These days, with some exceptions, the fundamentals no longer appear to be the driving forces in the markets. Now pretty much everything runs off of government or central bank announcements and actions. Commodities like oil, corn, wheat, gold/silver, etc. have moved from being sleepy markets of producers and consumers to active asset classes for speculators. Just take a look at the chart of any of these commodities over the last 100 years to get the picture. Everything has changed about everything. Companies like Google and Apple have outrageous valuations driven up by speculation - bubbles. Oil prices change, sometimes radically, based on government announcements and not on supply and demand. It is all pretty crazy. I read recently that a study by the NY Fed Res estimates and that about 50% of the stock market valuations are the result of its own interventions.
I work for a wall street company in foreign exchange. And, it all looks high risk to me. It simply can not go on like it is now - it is unsustainable. There will be a trigger event(s). I do not know what it will be or when it will happen - but soon - in the next year or so. The entire gig we have right now is funded on crazy money. The US Fed Gov is on an out of control spending spree. The Fed Res is holding interest rates at all time record lows to allow the Fed Gov to continue the spending spree, If Fed Gov spending is brought into line with revenue there will be a massive emergency - truely massive. It is hard to even imagine what would happen. And yet, at some point through some series of events Fed Gov spending must be brought into line with revenue. I honestly do not see how that is going to happen in the current environment.
Part of the story is the Fed Res constant meddling in the markets. There appears to be a group of people that try to stop market panics. You see a market(s) start to plunge and then it stops and reverses. This happens on a regular basis. This activity mystifies everyone I know. I suppose the purpose is to stop a panic fueled by a general loss of confidence. That is the most dangerous type of panic.
Fiat money fueled paper asset speculation is a dangerous sport. Credit and debt derivatives are dangerous in the current climate. Interest rates are bound to go up sooner or later. When that happens there are going to be major problems. The enormous amount of very low interest treasury instruments that have been sold will have to be discounted to be re-sold when interest rates go up. There will be a blood bath in that market. Equities will dive. Gold/Silver will go up big time as a place to run to and hide. At some point there will be a rush to preserve capital from major losses. Any kind of physical asset will rise. Paper assets will fall.
CM is right. It is going to get crazy.
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