Nick36

The Fed Backed Itself into a Corner

The problem is that the Fed can't help the Main Street directly. The Fed can only bail out the big banks and give them lots of money on very favorable terms.

But it's up to the banks to decide what to do with the money. And if they want to gamble in financial markets instead of helping the Main Street. Then there is nothing the Fed can do about it.

Another problem with the Fed preventing the economy from getting much worse with easy money policy and ever bigger accumulation of consumer and government debts is that the Fed is also preventing the economy from getting much better. Because the debts are a burden on the economy. And big debts limit the prospects of further economic growth.

The policies of the Fed attempting to produce never-ending economic growth have led to never-ending accumulation of debts. And now the debts are so big that they impede further economic growth.

The Fed is at the end of its rope. There isn't much more the Fed can do. And if the Fed looses it's independence. Then in the end that might be the way out of the current predicament of too much debt. The country needs to get rid of its debts one way or another in order to go forward. And there is no way to do it as long as the Fed is in control.

All Bubbles Are Equal, But Some Are More Equal than Others

Whenever there is a bubble, there is always somebody building up debt and leverage to fuel it.

In the present speculative bubble, it's various governments and the Fed who are building up leverage and borrowing a lot of money.

The current $1.4 trillion per year US government deficit is nothing to sneeze at. And the Fed is loading up its balance sheet with all kinds of debt securities too.

Debt is debt. And it needs to be repaid regardless of whether it's private entities or governments who owe the money. But it's not really the governments who owe the money. It's the taxpayers.

The taxpayers are now leveraging themselves up to fuel the most recent speculative bubble. And things won't go well for taxpayers when this latest bubble bursts. Because the financial system hasn't been reformed. Banks are now gambling with taxpayer money. And if they loose. Then taxpayers will pay.

David Rosenberg on 'The Mother of All Jobless Recoveries'

Perhaps this is the kind of economic recovery Herbert Hoover had during the Great Depression.

He managed to get a temporary stock market surge. But the unemployment rate kept going up. And eventually the stock market responded to that.

President Obama is now trying the Hoover solution to get the economy going again. And if he doesn't change his tactics and start creating jobs directly by hiring people on government payroll. Then he'll probably end up being a one-term president.
www.washingtonpost.com...

Debt Monetization: He's Heading for That Small Moon

Perhaps debt monetization isn't just an internal US problem. Foreigners hold trillions of US dollars. And there is a limit to how much monetization they will tolerate before they panic and decide to get out of their US dollar positions.

And if foreigners panic like that, then it will be bank run on the Fed and the whole US financial system. Which the Fed will be powerless to stop.

Perhaps foreign central banks have agreed at the G-20 meeting to let USA monetize its $1.2 trillion Agency Debt and $300 billion of US Treasury bonds. But if the Fed tries to go beyond that without the agreement of foreigners. Then this whole thing can easily end with a huge bank run on the US government and the Fed itself.

Q3 Earnings Season Underscores Rebound

There is something phoney about Alcoa's reported earnings and their prediction for higher aluminum demand in the future.

A footnote from Briefing.com says that Alcoa's reported earnings of 0.04 cents per share exclude non-recurring items. Which means that Alcoa might have lost money just like analysts have expected. But the management of Alcoa decided to exclude this loss from their reported earnings.
www.briefing.com/Gener...

And if there is such good demand for aluminum in China. Then why are analysts in the industry saying that the aluminum market is oversupplied and will likely remain so for the next 6-12 months?
www.purchasing.com/art...

And the State Council of China has recently banned the building of new aluminum smelters to prevent overcapacity and oversupply of aluminum.
www.chinaknowledge.com...

The Key to Regulatory Reform: Flexibility

I don't think any kind of regulations or flexibility in regulations can work well when executives and managers know that the Fed and the US Treasury will probably do their best to bail them out in case of any big trouble.

You can have the best regulations in the world. But if the financial industry lobbies politicians and gets them to appoint regulators who won't enforce the rules. Then this isn't be much better than having no regulations at all.

The Fed had plenty of powers to stop the housing bubble from getting out of hand. But both Alan Greenspan and Ben Bernanke denied that there was any housing bubble until it was too late. They refused to use their flexibility and discretion to protect the financial system.

To make regulations credible, the US government needs to eliminate the moral hazard where some companies are too big to fail. Everybody needs to play by the same rules and suffer the same consequences if they make wrong business decisions.

No regulations can prevent people from taking excessive risks, when these people know that if they win then they keep their profits. But if they loose, then US taxpayers are responsible for the losses.

Q3 Earnings Season: Not the Time to Get Short

When the stock market is overvalued, then you can never tell when it's going to crash.

But one thing to keep in mind is that last time short-covering might've caused the stock market to rise. And such short-covering might not happen this time. Because this time too many people are too scared to short the market. Instead of short-covering, the stock market might end up with profit taking.

Also, a lot of traders follow operational earnings rather than reported earnings. And by now companies might running out of one-time losses they can ignore on their balance sheets. Which means that their operational earnings might be going down drastically and falling in line with the much lower reported earnings, even while their reported earnings are better than expected.

Adjusted Jobless Claims Suggest Recession Has Ended

Whether the unemployment is still increasing or not depends on the number of people getting hired and not just on the number of people getting fired. And that's something your graph doesn't show.

If there are more people finding jobs than loosing jobs. Then indeed the recession might be over, even with 500,000 initial claims every week.

But if the balance is tilted the other way, and more people are loosing jobs than finding jobs. Then the recession most likely is continuing, at least as far as the working people and the consumers are concerned. And 70% of the US economy depends on US consumer spending.

If you look at correlations in numbers without sound logical reasoning. Then you can find all kinds of meaningless correlations and trends that can easily deceive you into believing something that isn't true.

One of the Last Bears Standing

The fact is that due to recent changes in accounting rules, a lot of financial losses of banks and other institutions have been hidden instead of accounted for.

And many Bulls are intellectually dishonest when they pretend that the financial crisis is finished and all of the losses have been accounted for. This simply isn't true.

There are hundreds of billions of losses that still need to be accounted for. And that's why the so called trailing P/E is a true reflection of the economy.


On Oct 01 10:31 AM thiazole wrote:

> They will improve based on the simple fact that you are using trailing
> P/E ratios to get those numbers, and the worst quarters (where companies
> lost a ton of money) will fall off the trailing data eventually.
> Why should we all pretend that this event won't happen and be surprised
> when the trailing P/E magically falls a bunch? Remember how many
> $10s of billions companies lost in Q4 2008? That quarter alone is
> responsible for vast majority of the P/E ratio that you cite.
> Those of us who are bullish have made this case DOZENS of times,
> but for some reason bears keep citing the trailing P/E number as
> if it were a new revelation. It makes me think that many bears are
> being intellectually dishonest.
>

One of the Last Bears Standing

In the long run, stock prices will have to be related to the earnings of companies. And the reported earnings of companies so far are resulting in some pretty wild P/E ratios. The S&P 500 P/E based on reported earnings is well over 100 now.

It's the Bulls who need to prove their case and not the Bears.

The Bulls are predicting that the earnings of companies are going to improve a lot. But whether that's true or not still remains to be seen. And the present fundamentals of the economy simply don't support this kind of an optimistic prediction.

Bulls can hold onto their stocks and not sell them for a while, even while the economy stagnates without much improvement. But eventually they will sell. Because staying invested for the long term with such poor P/E ratios simply doesn't make sense. They can get better yields in government bonds with a lot less risk than in the stock market.

Don't Ignore Low Interest Rates

It all depends on which P/E you choose to use.

The official P/E of S&P 500 is now well over 100.
www2.standardandpoors....

And a P/E of 100 is equivalent to getting paid 0.7% per year on your investment. Which is a lot lower than the current 4.09% you can get by investing in 30-year US Treasury Bonds.

You can argue till you are blue in the face that the earnings of companies are going to improve a lot in the future. But nobody knows the future for sure. And present day facts clearly show that US government bonds are by far a more profitable investment than the current stock market is.

Fisking Scientific American on Peak Oil

Perhaps there is still plenty of oil in the ground. But the remaining oil is getting more difficult and more expensive to extract.

It takes the equivalent of 1 barrel of oil to extract 5 or 6 barrels of synthetic crude oil from oil sands.
en.wikipedia.org/wiki/...

And extracting oil from oil sands is a very labor intensive process, which also costs a lot of money. Deep sea oil extraction and extraction of oil in the arctic is a lot more expensive than extracting oil in the Middle East has been. And even using new technologies to extract more oil from places like California also involves a lot more expense and more labor.

It's not so much a question of whether there will be enough oil in the next couple of decades. As it is a question of how expensive that oil is going to be.

High oil prices act like a tax on the economy. And at some point, the high price of oil will limit economic growth. People won't be standing in lines at gas stations to buy gas for their cars. But they won't be driving their cars as much as they used to either.

And if transportation of goods becomes a lot more expensive. Then this will limit international trade and commerce. Because lower wages in China and other distant countries will be offset by higher transportation costs.

Ten Reasons for an Imminent Stock Market Crash

An imminent stock market crash can stay imminent for a long time before the stock market actually crashes.

In the late 1990s, some stock market commentators were predicting and imminent stock market crash for a couple of years before it actually happened. Even Alan Greenspan coined the phrase 'Irrational Exuberance' to discourage investors from driving up stock prices too much. But at that time, his words had little effect on the market.

Perhaps this time it will take a lot less than a couple of years for the imminent stock market crash to happen. But it still might take a few months.

The stock market has basically priced in a V-shaped recovery in the earnings of companies. And quite possibly this pricing in was done by the big investment banks as a way of intervening in the stock market using free money from the Fed and possibly with the blessing of the Fed.
ftalphaville.ft.com/bl.../

This V-shaped recovery in the earnings of companies is unlikely to happen in the near future due to rising unemployment and poor consumer spending. And sooner or later disappointed investors might sell.

But if it's the Fed in cahoots with the investment banks who has driven up the stock market so much. Then a stock market crash might be engineered too in order to help the government sell US Treasury bonds some time in the future.

The US government is planning to sell an awful lot of bonds. And sooner or later a stock market crash might be just what the doctor has ordered to help the government sell its bonds.

October 1 is the start of the new fiscal year for the US government. And some time after that a stock market crash might be needed to help the government sell its bonds.

James Grant in the WSJ: Eloquent, But Wrong

Eventually there might be a V-shaped economic recovery. The only question is when and from what level?

In 1930, many commentators also cited history and predicted an imminent economic recovery in USA. And eventually a V-shaped recovery did come in 1934. But by that time investors who listened to the so called experts lost their shirts in the stock market.

And even that V-shaped recovery wasn't good enough to get the country out of its economic depression. It was a V-shaped recovery in a relative sense. In absolute sense, the US economy stagnated for many more years.

You can use history to support any prediction of the stock market you want. It all depends on how you choose to interpret history.

Not so long ago people were predicting that Dow will go to 36,000. Which shows just how ridiculously unrealistic predictions about the economy and the stock market can get.

The Greatest Bull Market that No One Loves

When the bull market is full of bull. Then only the naive love it.

The earnings of companies haven't improved nearly as much as the stock prices have risen. And that looks to an awful lot of people like an overpriced stock market. That's why this bull rally rose on such a thin trading volume, with insiders of companies selling like mad all the way into this rally.

Only the naive believe in a pyramid scheme like this. Not everything that looks good is good.