Friday, June 1, 2012

Employment reports and markets

This is a post I wrote on Karl Denningers Market-Ticker.  Thought it was time put something here.
The amazing thing about the decline into the close yesterday is it formed an almost perfect elliott wave on the prior decline. I don't question the decline, but the rally instead. News yesterday wasn't that good, unless one wants to buy into the nonsense rumors about fixing Europe. The exit out of the stock market is going to get narrower and narrower.

Every time something like this comes up, there is more talk about QE and stimulus. What the hell do you think we already have? The only difference between QE and t-bills is a fraction of a percent. In fact, German 2 years are trading at near zero. They don't print money and throw it in the street. It is more like selling your free and clear house. Someone else has your house, you have $100,000 or whatever the sales price was. In fact, Fed money is a debit entry, so instead of having bonds or bills, the banks have liquidity. If the Fed buys directly from the government, the cash does end up in accounts.

The big bullshit is the story of deleveraging. Deleveraging what? As long as the amount of debt in the system remains the same or grows, there isn't any deleveraging. I hear the delusional Richard Koo talk about the private sector in Japan deleveraging over the past 20 years, yet their private and public debt is now over 500% of GDP. Absolute bullshit when you look at the real figures.

What QE actually does is give banks more free liquidity to run corners in stock, bond and futures markets. A bank can be legitimately bankrupt, but if it has funds to exchange in the markets, it can appear as solvent as John D. Rockefeller. Drop the FDIC insurance back to $100,000 and see how solvent some of these TBTF banks are. I suspect banks like BAC, C and JPM are already short actual funds and still beholden to the bond and fed funds markets for their liquidity.

This brings up the reason for QE in the first place, to keep the TBTF banks solvent. These are the outfits that are fucked when the markets start coming apart. Wasn't LTRO in Europe a back door bank bailout? More money in the accounts to pretend their assets are good. The ECB is so full of crap and worthless IOU's that if any large group of speculators questioned the Euro, it would collapse in a pile of rubble. The quoted solution, eurobonds, would be the nail in the coffin, as a partially solvent Germany is the only pillar of any size standing in Europe. France could no more do what has been forced on Ireland, in regard to their banks, than Hollande could follow the cow over the moon. So, the only solution is to give the drunken sailors more money to finish their binge.

Then, we have stimulus. The idea of stimulus would be okay if they ever took the stimulus away. Fed spending never went down after the $700 billion plan. In fact, I think $700 billion turned into $1 trillion and has remained there. The fiscal condition of all countries involved has deteriorated greatly over the past 4 years. Instead of solutions, you get comments out of the President that a legitimate country pays its debts, so raise the debt ceiling so we can borrow more to pay. This idea and intelligent life don't fit in the same sentence, pure absurdity, but it sells to someone. Namely it sells to idiots like Nobel Economic Prize winners. Someone beat me in the head with a baseball bat, as I could stand to win that prize myself. had a link yesterday to a Scribd presentation by an ex GS guy. What he brought up was the end of the road, which will begin with bank failures in Europe. Watch this Bankia situation. If not Bankia, it will be some other bank. It could be the big bank in Belgium (Dexia) that rolled over last year, that is being floated on fiction. The one thing floating the US right now isn't the wonderful economy. It is more like my girl friend has herpes, theirs has AIDS. Mine looks pretty good if you have to make a choice. Or, you can remain celebate and buy gold and put it in a hole in the ground. The Euro could vaporize over night.

The CNBS crowd always brings up buying stuff that isn't exposed to Europe. How has that worked in Europe for what wasn't exposed to US housing? What isn't exposed to Europe is exposed to what is exposed to Europe. What is going to be exposed to the world debt markets? The whole matter. When is Japan going to blow? It will and when it does, the world will look to the US and discount its debt as well. The attractiveness of 10 year treasuries and 10 year Japanese bonds at this time is you can get money from the Fed or the JCB on these items. There is a lot of stuff out there where there will be no market or only at a very deep discount.

Think interest rates are coming down? Ask Spain or Italy if they are headed down. The door on risk is about to close. QE will get a small blip on the radar at best. The floor before the market broke down in 2008 was 1200 SPX. We are a mere 7% above that level right now and below quite a bit of the trading during that sideways move. Hundreds of billions have been invested in the SPX to cover recapitaliation of banks and loss of bankrupts. There have been 2 rounds of QE, a bailout of the banks, $5 trillion or more in deficit spending and the market has gone nowhere. If you had stayed in 10 year treasuries from July 2008 to the present, you would have beaten the stock market by a good margin.

The one thing that amazes me is the move in gold on the employment news. Remember, the guy on the street can't rush in and buy or sell gold or the stock market on this news. Why the plunge in stocks and blow in gold? I have 2 words, Goldman Sachs. How many contracts does it take to move a gold market or a stock market? Not many when the world stops. When I say Goldman, it could be JPM or both or all of the above. Best guess is there were a lot of shorts in gold as a hedge, as gold and stocks have generally been moving the same direction for some time. If this is the case, they likely were blown out in both directions. Never forget, in markets the guys you are dealing with can see our cards.

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