tradersutra.blogspot.com/2009/08/reasons-why-market-does-header-this.html
This is just a continuation.
The credit crisis is over. We have averted a great depression. Green Shoots are all around us. The recession is over. Watch out for the impending economic recovery. Its just right around the corner. Well sure there is some slight validity to all of these claims, if you live on Mars!
Let me understand this: Isn’t a bad decision supposed to turn into good policy when you back it by trillions of freshly printed U.S. dollars?
"Conventional wisdom" suggests that when you lower interest rates to near zero, Spray lots of money onto the economy through spending programs and credit facilities, the economy will recover, goodness it has to. I have some serious problems with this. Lets start off by examining the magnitude of this credit crisis. After living through it, was there anything "conventional" about it? Of course not. So why would conventional wisdom hold up here? You might say that the economy has stabilized, stock market rallied over 50%, and unemployment inched lower this past month. Lets take a look:
1- Economy has stabilized, because policy makers who lie for a living tell us so
2- Stock market has bounced because its been controlled by HFT
3- Banks are reporting better results because of accounting gimmicks.
4- Unemployment inched lower is something so ludicrous that I cant even explain it.
5- Housing has stabilized because it was falling like a brick, it just decelerating.
I am thinking you are sensing a theme here? The first four are all about expectations of a turn around professed by people who lie for a living. Remember its the policy makers, Wall Street, and the bankers that put us in this mess.
It should be no surprise that when a financial institution has access to essentially free money and all losses are guaranteed that they manage to report “better than expected” earnings.
The entire economic recovery was on the backs of Inventory rebuilding. Just look at Intel's earnings report.
The big scam that Geithner/Bernanke are trying to sell and bottom line succeeded was to show an improvement in sentiment. To be sure, an improvement in sentiment is essential to any recovery as consumer confidence influences spending and investment decisions. But surely they understand that after a 30 year credit orgy bubble American consumers are tapping out of the figure four credit leg lock?
But with trillions of dollars committed, with fiscal and monetary spending put into high gear, what are policy maker to do?
Let’s take a closer behind the scenes look at the Federal Reserves balance sheet.
This is basically money that has been printed out of thin air. I wish I can do that. This money is actually not printed or put in circulation, where would you store first of all? But rather its all done electronically.
When the Fed increases its balance sheet, an uptick in economic activity "may" and "should" result as more credit is made available to the economy, It really should be called “super money” as there is a high multiplier effect between the money the Fed makes available to the banking system and the economic activity that may be created. This is also where the "Velocity Of Money" term is also created. But all of this only works if the end markets where the money goes actually filters through the economy which basically is the consumer. Is this happening? Want to buy a bridge? Its the same old supply side/trickle down effect that has never ever once worked. The banks have taken all of the money and stashed it to rebuild tattered balance sheets, refinance trading positions, and fund bonus's.
Last September, the Fed balance sheet stood at $1T, since then it has doubled, with zero economic activity gained. The massive Fed programs to buy treasuries and mortgages have brought spreads in, which really only helps Wall Street. Don't be fooled to think the Fed is going to shrink their balance sheet anytime soon. Any shrinkage is purely accounting tricks to divert attention. New York Fed, for example, has been very interested in moving assets into special purpose investment vehicles (SIVs) to remove them from its balance sheet. I have spoken about Maiden Lane LLC.
tradersutra.blogspot.com/2009/07/maidon-lane-llc-ulimate-siv-ponzy.html
This is no different then Adelpis, Worldcom, and Enron cooking the books. They will do what ever it takes so that the golden goose that is Wall Street is not cooked.
The FED's primary mandate is price stability, that has changed, its now accounting fraud.
But wait, there is some backhanded reasons why the FED has temporarily stopped the balance sheet expansion:
-Some of the Fed’s programs are indeed fading out. Amongst them are support for the commercial paper market as the panic has abated, as well as certain liquidity facilities that are not cost effective to the borrowers.
-Some of the Fed’s purchase programs have been off to a slow start. Some, like the Public Private Investment Partnership program because they are ill designed, others because the Fed may want to influence the market by the simple announcement that they intend to become active, but then saving its firing power. The mere announcement can move a market, at least in the short term.
-They have to save some of their gun powder for massive treasury refunding.
I generally think that the FED has not stopped printing money. They still have a plan to buy back some $600B in MBS. Bottom line, all of the money that has been thrown against the wall doesn't stick, more printed money will be thrown.
All of this is based on the conventional wisdom approach.
Reasons why I think that the sequel to last years credit crisis is making its debut later thus fall.
1- CIT. I have spoken about CIT and its importance. A bankruptcy is very possible.
tradersutra.blogspot.com/2009/07/cit-group-is-going-to-hurt.html
2- The Federal government is going to have to issue more debt to finance this mess. More supply just means higher rates.
3-More and more banks need to go back and raise more cash. The ECB to many is already foreseeing a coming credit crunch
4-Personal Bankruptcies and credit delinquencies are still accelerating.
5-Shadow inventory in Housing is very scary.
6-The situation in California needs to be closely examined. No one is really focused on that fact that California is basically bankrupt.
The stock market always overshoots, this time to the upside.
Will we see a flight to quality? A flight back into the USD and Treasuries? If it does, we believe the pendulum will swing less than last year. Consider in particular that the balance sheet of the U.S. has deteriorated over the past 12 months. While the U.S. may still be considered a safe haven, it is not the safe haven it was a year ago. Governments around the world have also not been sitting idle, making a flight to the U.S. less likely. Panic may not evolve as the U.S. and other governments have made it clear that they may do whatever it takes to keep the financial system together: Print money!
Coupled with the massive supply of debt to be issued should push up the cost of borrowing (raise yields/lower prices of debt securities). However, that scenario is exactly the opposite of what the Fed wants to achieve. The Fed wants to keep the cost of borrowing low, especially for the housing market. As a result,the Fed will ramp up its intervention in the bond markets if and when credit deteriorates once again. The only question remains: How many bullets are left?
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