Spending my money, no, I didn't care
Taking my friend John out for a mighty good time
Buying that good gin, champagne and wine
Then I began to fall low
Didn't have a friend nor no place to go
If I get my hands on a dollar again
I'm going to hold on to it until the eagle grins
-Recorded by Bobby Womack
For all the bluster and talk about making it rain and spending money, rappers Rick Ross and Lil' Wayne have so much to learn from Ben Bernanke and Mario Draghi. Of course, the underlying belief among many in the rap community is that each day above ground is a blessing that wasn't promised, so living the moment to the max is the philosophy that drives their amazing ability to go through millions of dollars buying luxury cars, eye-popping jewelry, and throwing off-the-chain parties. While such thinking means these guys typically end up broke and broken, the short lived extravagance is a heck of a spectacle to witness. But, not even in their wildest dreams could rappers match the spectacle created by the actions of central bankers.
Ben Bernanke has used all kinds of gimmicks from his magic tool box, but it all boils down to money-printing, and when that happens there's going to be a party. Investment legend Jim Rogers used to always say to me, "show me billions of dollars and I'll show you a good time, too." That's true, so you can imagine what happens when the printing presses start pumping out more than a trillion dollars and Euros. The majority of market experts I speak to say this current rally can all be traced back to the first Long Term Refinancing Operation (LTRO) back on December 21, 2011 that saw 489.0 billion Euros rain on more than 500 European banks. Talk of that operation put a floor under the market, and the day before it was enacted the Dow opened at 11,769.
Fast forward to this morning, and the smoke machines and strobe lights were on full blast when the ECB announced round two of LTRO will be 529.5 billion Euros. That's an interesting number, higher than the official consensus but significantly lower than whispers of 1.5 trillion. Still, you don't have to be an investing legend to know this sum, which is $713.0 billion, could get feet moving. The thing is, however, the party already began, and the tab has already been running and there is an anti-climactic feeling about the whole thing. For the banks involved, rumored to be north of 800 (the first round saw little more than 500), it is music, especially those banks in Spain, Ireland, France, Cyprus, Austria, and Portugal where collateral standards where relaxed.
Now investors will be waiting to see what the Fed does next, as the ball is back on their court. The dilemma for the Fed and Wall Street is how to deal with news that's not great but not bad enough to justify, under any spin job, additional money-printing. The thing is inflation is now in the pipeline, and it's just a matter of how fast it spreads. We are seeing it in the stock market and also on the price of gasoline. Last time Alan Greenspan made it rain too long we got the housing bubble and for sure there will be some kind of bubble coming soon, yet that's the risk central bankers are willing to accept. Unlike rappers today these guys are living for the moment.
Ben Bernanke needs to blow money really fast, for him it's the only way to save the economy, and maybe his job.
For the rest of us it means we party hard while we can and prepare for that moment when we begin to fall low. But, preparing for the moment too early means that when the time comes you'll be less prepared to ride it out. How ironic that will be for those that understand history and the concept of fiduciary responsibility to actually suffer the most when undisciplined monetary and fiscal policy blows up in our faces. I get it, however the last couple of bubble explosions had you holding on until that eagle grins. The smarter approach is to take advantage of the gimmicks, but never believe the hype, so when the music stops you hear it and move off the dance floor. By then it's going to be so crowded that few will realize it's stopped-that's what happens when you get drunk on good gin, champagne and wine.
We finally got a three handle on GDP in the new revision of growth in the fourth quarter of last year, which beat consensus of 2.8%. There was an initial move higher on the news, but other parts of the report were revised higher, too, including the GDP deflator. The deflator more than doubled to 0.9 from 0.4 in the first look, which means prices for all new, domestically produced, final goods and services were much higher than initially thought. The bias in the market is still to the upside, but the oomph factor is limited. The next big turbo boost has to come from a strong jobs report. There are a lot of important economic reports out before next Friday, but I think they'll have to be real disasters to ease the perception that things are so good now any level for the market is warranted.
On that notion, however, the first session that sees a sell off into the close has to be noted. I think smart money is taking profits (we have issued a ton of alerts and cash is now 25%) and trying not to be noticed while experts keep telling individuals to load up. The first yellow flag has appeared and that's the bifurcation of Dow transportation stocks versus the Dow industrials. Purists like to see the transportation sector leading the charge or at least participating in the rally. It's worth noting that recently these names have begun to drift lower.