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And Then There Was More Debt, Weaponized Oil And War Expansion

Saturday, January 17, 2015

After one month of market gyrations, has seasickness settled in yet? It used to be that a weak dollar, courtesy of the Fed’s QE, meant a strong market, and now it’s the opposite due to the purported ECB’s QE and BOJ monetary games, with any hint of a rising euro and/or yen throwing the market for a loop, and one must be in the trenches to observe every psychotic tick. Who's got the bigger printing presses? But then the unexpected happens for short periods of time with the dollar rising and market sinking. In addition, gold (GLD) is on a short squeeze fest as the dollar goes north and inflation goes south. Who would have thought?

So looking at this market from a fundamental perspective is like trying to examine the thought process of an octopus with dementia. The good news, for the time being, is that high yield debt (HYG, JNK), a.k.a. junk, is holding neutral and providing a soothing effect that is hard to see. Where’s the Fed's ammunition this time around? Jawboning? Oh yes, some Fed members say that rates will rise and then some say they won’t, and the market is saying that they won’t, until they do, although not driven by economic strength but increased supply and risk.

Forget the housing bubble and let’s look at New Home Sales over 50 years or so, up to November 2014, and try to pinpoint the economic strength!

And for those suffering from beautiful economic hallucinations and convinced that the worst is over, here are Mortgage Delinquencies which are still almost triple the rate that they used to be as we celebrate 5% GDP (no, not really). In short, we’re well on the way to consuming a decade after the first boom induced foreclosure blip showed up on the radar.

Throw in population growth, and if one doesn't get the picture, one doesn't get it. Did you find the recovery yet, or are we listening to “Ball of Confusion (That's What the World Is Today)” by the Temptations and released in the 1970s? Or maybe we’re hanging onto another 70s song titled “Give Me Just a Little More Time” by The Chairmen Of The Board. How fitting! Does anybody pay attention to Fed speeches anymore? Are they looking at their own data library? Do you know what the biggest and extremely arrogant mistake that central bankers make? Believing that they can fix economies, never mind understanding economics, especially as they apply to common folk. Furthermore, no wonder CNBC’s ratings are dismal because people want the truth — the good and the bad — not clueless fluff disguised as news and expert opinion.

On the Eurozone front, an interesting piece of news came from The European Court of Justice, in the form of a non-binding opinion that may stick.

The opinion also said the ECB has "broad discretion" in implementing monetary policy and noted that OMT is "necessary".

But was it a legal opinion, which is categorically wrong anyway from a treaty perspective, or an economic one with the emphasis on the word “necessary?” Just because it’s necessary, it’s not necessarily legal! But if QE is coming from the ECB, what is the market fuss all about? Maybe people are starting to realize that what has taken place over the last several years is nothing more than mere central bank exercises in futility. Then the Swiss, a central bank that hardly makes it to the front page, even below the fold, disposed of the “three-year-old cap on the franc” and the euro went bottom fishing, adding to the confusion, disrupting currency markets and players, and sending the Swiss Market Index down 13% for the week. Way to go, brainless suits! If anything was learned is that leverage is a drug with diametric side effects: financial exhilaration and despair.

Meanwhile, and only as a refresher because the map below was first shared in February of 2014, global public debt continues its march onward without a set destination, and the sea of red in major economies is impossible to miss, with the grand total around $55 trillion. Those with low debt don’t matter, although one would think that the green group would have higher debt due to weak economies. What’s wrong with this picture?

Who will service all of this paper, and will future growth address the problem? One is free to believe what one wants! I know, it’s about entitlement, but, to clarify, here’s what everyone is entitled to by default: oxygen. And coming from a politically independent individual, heavy on social responsibility and, let’s not forget, accountability, let me remind everyone that one must work or fight for everything, such as food, shelter and liberty. Even water won’t come to you. You must get it, and no one has the right to expect me to be their water boy, although I will always choose to help the less fortunate. Got it?

The assumption that the Eurozone is fixable is as far from the truth as it gets, and let me put it this way: The introduction of the euro was the creation of a quicksand pit where everyone sinks and nobody gets out, at least unharmed. It was stupid back then, but what can we expect from politicians? But the common currency is not at fault on its own, and only exacerbated the structural problems that had been festering for decades. Please don’t take my word for it and get irritated for no good reason: watch from the comfort of your couch.

I don’t usually agree with economists, or read much from that field that is on the money, but here’s an exception that delivers a succinct view and paints the right picture, courtesy of Barry Eichengreen, an economic historian at the University of California at Berkeley.

“While holding the Eurozone together will be costly and difficult and painful for the politicians, breaking it up will be even more costly and more difficult,” he said.

And when the reality on the ground is that “Olive oil demand falls in Europe homelands,” we know that we have a problem. Greece is quickly approaching election day, and the nervousness is palpable because somebody up north may be left holding the bag. Then again, how much worse can it get for the Greeks when olive oil is under attack? Only last year, all was well. Silly humans! As usual, the IMF had to weigh in and try to stay relevant, and the headline was “Anemic growth warrants easy monetary policy: IMF's Lagarde.” Here’s the counter argument: At some point laxatives will kill you!

As a side note, an interesting revelation by Ben Bernanke regarding Fed meetings confirms the view that these people are overpaid.

“They get lots of attention ... and most of them are deadly boring,” said Ben Bernanke, the former Federal Reserve chairman from 2006 to early 2014, in an interview with the BBC. “They are very scripted. The staff do all the work and they write the communique in advance of the decision making.”

Thus we have a crashing euro and oil, and, fundamentally, we’re not well, and on the oil subject, I shall bring back the map that I shared in March of 2014 in the article “Quantitative Extravaganza Fiddle-Faddle, Up The River Without A Paddle,” which highlighted Putin’s objective.

Saudi Arabia has denied that the drive to take oil (USO) down a few notches has nothing to do with geopolitical motives, and it’s a matter of supply/demand and competition from shale, not to mention the strong dollar. Understood, although I would say that under normal circumstances, production would have been cut already. In 2008 we had a crisis, and now, for all purposes, we don’t -- yet! Moreover, Iran’s nuke negotiations were postponed from July 2014 (oil started to drop) to November 2014, and then to June 2015, and oil prices are a sure way to pull the rug from under Russia’s and Iran’s feet. Kill two naughty birds with one fossil. However, Russia and Iran now have an incentive to do something disruptive to drive oil prices up, and if anyone chooses to listen to Goldman Sachs (GS), a source that is seldom right about anything, or $200 oil when it was $150, and now lower than it already is, do so at your own risk.

Finally, I offered in October of 2014 the following in the article “Markets Love Fed, Hate ECB, Want More QE” regarding conflict, which is an integral part of market playing, although it has been dismissed thus far.

The only added observation regarding fanaticism inspired conflict, and I hope that I’m dead wrong, is that it may extend to the streets of Europe and America for obvious reasons.

Well, it has arrived in Paris and will not stop there — Belgium is the latest, Germany joined the fray, and Greece detained suspects — and I shall offer that, when push come to shove and to the surprise of many, the Europeans will be far less politically correct than the Americans. Conflict is going to happen in a major way, whether we’re ready for it or not, and summits are not a replacement for rolling up the sleeves and dealing with problem head on. We know what both sides want, and there’s no room for negotiation. What caught my eye was the manner in which the “terrorist mission” was accomplished with the use of automatic weapons, which are not easily obtained throughout Europe, but are far more accessible in the U.S. of A. Stay safe!

And wait until the common folk come to the realization that central bankers are responsible in large part for where we are, economically speaking, through their arrogance and silly economic theories. If I was a central banker I would seek high ground! Although not a prediction only because that is not my game and I couldn’t care less where markets go, I wouldn’t be surprised if the market is 50% off by the time the next Christmas’ bells ring (SPY, DIA, QQQ). But tread carefully because the reputation of the central idiots is on the line, and while the recipe is already screwed up, they're bound to add more spices to try and save the concoction, regardless of how the meal ultimately tastes. We’re going to need tons of crazy glue to put senseless humpty dumpy back together after the great fall.

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