The Treasury, Fed and Bankers Are Setting the Bull Traps

I opined early Friday, “Rather than continue to lower rates, I believe the Fed will now work toward a stronger $USD policy to achieve a similar impact.”

You knew if that happened (and it started a couple hours later), that Gold and Silver prices were headed lower, which happened. But what I didn’t say was that the Fed has no choice. Inflation is out of control in the US and elsewhere and the US authorities must keep it under control. The higher $USD, however, will depress any significant movement to the upside for equity prices except for carefully coordinated market operations from the Treasury, Fed and Humongous Bank & Broker. These rallies, then, are merely bull traps for the rest of us to sell into strength.

At the end of the day, there will be a second shoe to drop in the bankers’ de-leveraging and re-capitalization process. There will also be a continuous pull-back in housing prices, not only in America but elsewhere, which will put not only home-owners deeper underwater, but will sink some large size banks in the process, again not only in the US, but in the UK, Europe, and Japan.

So far, the Friendly Fed has not strangled the US banks like the People's Bank of China has to its nation’s counterpart commercial and investment banks. The credit squeeze underway there has taken the Shanghai Composite down from 6124.04 in October and 5522.77 in January to just 3094.66 at the close this week. That loss in China of -49.5% and -44.0% from the equity market highs just 3 and 6 months ago will be the sort of thing that ultimately could happen in other countries that are interested in prudent treasury management.

I think the leadership by the monetary authorities in many countries is pathetic. They are listening to bankers who are telling them that a multi-trillion dollar problem caused by bankers is no longer the bankers’ problem.

What this situation has done is to push me into day-trading forex, and potentially metals futures, both of which represent money and will sustain a value even in a depression. But to say there is a “future” (a sad pun) in equities [or even in debt instruments at such currently low interest rates], under the present circumstances is to accept the pretense that all is well.

Even in China, where European and North American scribes write daily of the exciting +11-12% GNP growth, there isn’t a single trader who could have survived a 100% long position in the past 3 and 6 months.

This global capital market is about bankers and credit and it’s a mess. How people can look upon it positively is beyond me. But, hey, I’m just one of you. Our contra opinion is what makes markets.

Comments

[ericinNE]

Bil, I've just recently started reading your posts, and it's clear to me that you suffer from the same affliction I do: The use of logic in the analysis of facts, to arrive at truth, in pursuit of pragmatic solutions. The stock market has become, now more than ever, an insane place w/ insane rules. Supposed "stock fundementals" that ignore underlying economic fundementals are worthless. Keep telling the truth, maybe enough people will someday come appreciate it. Till then, the rest of do. Thanks.

[AJ,WashingtonDC]

I would venture to opine that the market is in fact, an INSANE place with NO rules. Speculation, rumor and unsubstantiated opinions by "talking head" analysts rule. Other Analysts provide a constant stream of drivel for the blogger mill. I am an eternal optimist, and believe in real market forces, the power of supply and demand economics and above all the danger of inflation. When we talk of 8 percent growth in India and 12 percent in China, we don't seem to consider the fact that these economies have 7-8 percent ADMITTED inflation. Where's the growth? Besides, they have hardly begun building the infrastructure to be able to sustain the growth - I follow the Asian media closely for signs of large commitments to roads, bridges, dams, water supply, power generation, telecommunication (for example, the recent Indian budget announcement), and find that other than a few high profile facilities for big urban centers, there isn't much new expenditure on infrastructure. The prices of oil and food are beginning to cripple their economies, and in India, I would expect some major changes to the ruling coalition in the next elections on the basis of food scarcity politics etc. China has an iron grip on everything, especially the currency - this is scary, since we will never know what any investment in China is really worth. As for the Federal Bank here, and the Central Bank in Europe, the less said the better. Thank you for the insightful article.

[bluesmoke]

Over the weekend, I was talking with my wife about the big jump in the market on Friday. Even she, who knows little to nothing about investing, scoffed. What does that tell you?

[SeriousBull]

You are dead on it that this is no time to go long or stay long. The Fed has little alternative to printing money in direct or indirect ways. They see the enormity of the leverage, the amplitude of derivative risk, and the negative capital reserves in the banking system and are attempting to shunt a financial panic by doing what ever they can to keep the system afloat. It's a sad commentary when public money is used to bail out irresponsible behavior. Sader too that "too big to fail" now encompasses not just Citi but the whole of the financial system.

[adan]

funny bluesmoke mentiones even his wife scoffing at friday's rally, mine did too!

[ponchovilla]

I'm not sure where I heard this, but "the solutions coming out of Washington are likely to be worse than the problems". Combine that with the talking heads wanting a strong dollar policy and higher interest rates to curb inflation and a new mess will occur with global companies seeing reduced profitability and banks increasing their rates combined with increasing credit standards... I'm not sure there is a way out of the woods without pain.

[User 130076]

I like to hear from people that tell it like it is, and this article does just that.

[phinsuntanning]

we need more wifes talking here, is time to short Barclays again BCS and jump into singapore dollars

[What do Iknow?]

My wife is scoffing at the markets as well. Perhaps we could start a "'Wives' Who Don't Track the Markets' Market Report."

[joyce2h]

I am a "wife" who cashed out. Hubby held on, despite the fact that I was forwarding every article I could find that would help convince him this wasn't (and still isn't) our parents stock market. He finally threw in the towel a couple of months later.

I continued to follow the stocks we had sold, only to watch them running back up. I told him that despite the fact that I have followed the market for 35+ years; read financial news; do the
due diligence, etc., I had come to the conclusion that I knew nothing about this market and all investment decisions were in his baliwick in future.

We are both relieved to be out of the market and at this point can only liken it to the fairy tale "The Emperor's New Clothes."

WHO IS JOHN GALT?

[Bill W.]

You said: Rather than continue to lower rates, I believe the Fed will now work toward a stronger $USD policy to achieve a similar impact.”

How is the Fed going to accomplish this without raising rates?

Respectfully

Bill W.

[Basil]

You may be correct, but having lived through the 30's when
people were jumping out of windows and banks were failijng
across the country, but some how we survived and just look
where the Dow Jones is at today compared to where it was
15 years ago. Keep the Faith Baby, we will survive.

[icandoitdon]

joyce2H:

who is john galt? hahaha! ayn rand would turn over in her grave if she saw the state of the world's financial system today. the regulatory bodies have pushed us there. they are absolute disgrace to capitalism.

basil:

keep the faith? you're obviously under 40 and have never seen a bear market. i'd advise shorts to keep the faith...not bulls.

[droskoph]

The Fed cannot control deflation, it is the reaction to disappearing dollars. What they're trying to do is to counterbalance the shrinking dollars with fiat dollars. It's impossible but serves to entertain and quell the masses. Pretending they can fix this with a printing press is yet another opportunity to make the markets irrational by design. The massive liquidity in the US and the "fast money" mentality makes manipulation like this its own industry. The only decoupling we need worry about is that between economic reality and US markets because it causes crashes when the last fool finally wakes up.

[pharma]

Most people always believe in things "just happen".

Most often, it is not true. The author is correct: "the Treasury, Fed and Humongous Bank & Brokers" are in a very complicating and losing game of having a cake intact and eating it.

The USA and EU created a "new colonial era" using the reserve fiat-currencies system to exploit the rest of the world. The "consumer society" where the USA and EU enjoy a good life and the rest of the world working hard providing for it and in return getting close to nothing. This system is going down inflames.

Speaking about US financial market, one can only wonder how ibanks after huge write-offs and huge loses are still very close to their market caps in the most prosperous economic times.

Yes indeed, the Treasury, Fed and Humongous Bank & Brokers are great manipulators but, in spite of their best efforts, they are playing a loser game. Nobody can fool the mother nature for long!

[swaps]

This is a pessimistic post. As far as I can tell my modest stock holdings are about where they were in January, adjusting for some money I took out to handle a squeeze from a guvmint agency.

I had some gold positions, and coal and Brazilian telephone which offset some losses from January ill-timed buys in BDN plus some losses in some closed end real estate funds - RMP. And my drops in earlier acquired Ireland and Singapore closed end funds.

So I can feel the collapse in commercial real estate - which needs ongoing soft money lending to keep prices soaring. And that party has come to an end for several years. Money will be hard to come by, as will excessive appraisals.

But my gold stuff has been soaring since summer, corrected, and then has recovered somewhat - again showing the strength in commodities. I had a 123 percent profit in Consol. Energy, but cashed in when Morningstar ad flyer said that company faces pension liability pressures. It has gone up several dollars in the past week after I sold, again reflecting strength in energy and commodities.
In short, the price action of my modest holdings seem to be reflecting the premise of this post. What Cara is seeing and "opining" I am feeling. But there is no total wipeout yet in the broader economy. Not close. As a whole, the wider economy seems to show the same muddled results as my holdings.

A point I would like to suggest is that over the past several months there have been some big drops and scary days, but by holding on I ended up about even. Actrually ahead of the DOW

While the economy is very weak and in recession, many sectors are holding up. My Leucadia, Plum Creek, Brazilian phone, Am. Anglo Gold, Kinross Gold, Gold Corp are well above where I started buying since late last spring. Well, maybe Plum Creek is just holding,

So far the rot is in financials, real estate, retail. The muni's, student loans and related money equivalents are frozen, again related to financial mess. Much of the broader economy, not booming at all, is maintaining. The public wage sector is stabilizing.
If the general U. S. does not wake up to the greed and incompetence of the Fed and the patrons it props up, we might muddle through this.

For now - recognizing the economy is very uneven and indeed weak - I am sensing that the massive inflation from the Fed is just offsetting the massive deflation in money instruments (lost) and real estate pricing. It will take a while before the Fed flation begins to overwhelm the deflationary forces. Meanwhile, many consumers are being hammered by both forces at the same time.

Your wives may be intuiting just one side of the opposing forces.

But if a trap has been set, I will be caught in it.

[galewhitaker]

I think the institutions are playing a game of chicken. Eventually one of them will crack and head for the exits. When that happens you will hear a giant flushing sound as this market adjusts to the new situation, falling home prices and skyrocketing fuel prices. Its a formula for disaster.