Tuesday, May 01, 2012 All times ET.
Joan McCullough, East Shore Partners, 1-212-226-1223 Trading: 1-800-222-8723 email@example.com The market continues to play the same games ad nauseam. Most frustrating of all is the knowledge that HFT has taken over the show nearly completely. Another way in which ZIRP destroys jobs, eh? Think about it. While vexed by the monotonous repetition of the daily shenanigans, at the same time I am noticing a change elsewhere. In the rhetoric. Yessiree, Bob. In the past few days, there have been more articles written in serious complaint of how Bernanke’s policies are totally misguided. And about the damage being done to the US on account of them; the need to stop and switch game plans is made very obvious. But fat chance that happens, right? Because you and I have no voice; have not had one for quite some time as a matter of fact. I’m gonna’ digress now and vent. So if you’re in no mood to be cranked or have your goat gotten, hit the delete button and I’ll catch you at McCann’s bar another day. Let’s put this right out on the table in plain English; I’m quite tired of being polite. Ahem. You can fill in the blanks with the swear words of choice because the air is blue where I sit, trust me. I am that …. aggravated. I don’t give a flyin’ …. if you are a Democrat, a Republican, an Independent or a freakin’ Martian. It doesn’t matter a hill of beans if Obamacare persists, if we have a …. budget, if we hit the debt limit again, if Europe takes a …, if the Supreme Court upholds the State of Arizona, if they build the …. pipeline or stick the pipeline up yer …, if we fight in Iraq, Afghanistan, ignore Syria or encourage Egypt, if we defend our borders or if we killed bin Laden or if we have same-sex marriage or free birth control or any of the other flaming … they yap about and bicker over incessantly. As a matter of fact, I don’t even give a … if housing has or has not bottomed and if GDP is dependent on inventory build or on your Tia Teresita’s …. You got that? I don’t give a flyin’ …. . You shouldn’t either. And now I’m gonna’ give my opinion as to why. It’s all about the money. Always has been about the money. Always will be about the money. Unfortunately for us, we are being robbed on a daily basis by the central bank. Yes and while
they are robbing us, they are stealing our standard of living to boot. To the point where most cannot keep up with the cost of living in terms of planning for retirement. Because the X amount of dollars they might have targeted as a nest egg in 1980 or so … with a view towards, retiring while still able to walk a flight of stairs … is but a distant memory in terms of sufficiency. For those who married in the ‘90s and had children and made plans to send them to college, how’s that workin’ out for you … and for them now, eh? The idea of spending $150k on a 4year degree only to graduate and qualify for a $40k per year job or worse … for none … would be too much for me to bear as a parent. I would have to be restrained, trust me. For those who have young kids at home now, I wonder each day how they manage to feed and clothe them. But from the looks of grocery prices, for example, beef, the answer is that they cannot. Is chicken the alternative per the BLS substitution hallucination? On a good day, they get chicken. Once you step outside your Whole Foods fairyland, you’d see that the average family’s cart has rice, pasta and hot dogs. Think about it. Bernanke has mentioned that the price of Gasoline has spurred a bit of inflation. But that it’s “temporary”. Let’s keep this confined to beef and as simple as possible for the sake of argument. Okay. So Gasoline trades up. The price of beef goes up. People eat less beef. (Demand slackens.) The ranchers thin their herds in response. (Supply is withdrawn.) Gasoline trades back down. Big sigh of relief from the central bank. $10,000 dollar bonus question: Where the … are the herds now? Do they reappear and expand the herd overnight once Gasoline prices ebb? See what I mean? Ranchers have fine-tuned supply and Gasoline can trade at ten cents a gallon; it ain’t gonna’ create more heads of steer in a hurry. As any Austrian will tell you, people are involved in this phenomenon. And try as hard as The Bernank might, he cannot stick a person into a formula, a spread sheet or a PowerPoint presentation. It’s just not that neat an issue. Sorry, Bambi. You lose. This started as a highly predictable housing implosion. I would have preferred to see a Swedish solution to the banking crisis but that was not in the cards. As it turned out the FED performed an ad hoc brand of triage on the financial system. But then they forgot to back off. And crossed the line. And just kept right on trucking. We are now what since 2007? Awash with about $7 tril in printed money from the major central banks. And it has accomplished zilch. Bernanke is aware of that failure. And I am surmising that this is behind his suggestion that Congress and the Administration take steps to get the fiscal house in order. See? The FED can only do so much. Time to pass the baton? You bet. This requires a budget. Which requires spending cuts. Like Europe. Just like Europe. Where they call their budget cuts austerity.
And guess what? Neither side of the Atlantic looks poised to swallow any of it. Put another way, neither party in the US wants to take the rap for cutting programs. Particularly not when the words “food, school or kids” are in the same sentence. As for European austerity, one by one, they have already started to back away from those promises, all of which were executed under duress. Which throws the mess right back into the lap of the FED. Bernanke is already ‘in for a nickel’; no doubt he is gonna’ go for the dime. He cannot fathom any other option. And until he is fired or the FED dismantled, that option is gonna’ continue to ruin lives. And I for one, am at the breaking point, sitting here watching it and being powerless to address it. We have already discussed the extreme disadvantage to which the FED’s absurdity has placed investors. As he has distorted the yield curve to the point that it is of no use in assigning value, risk or the time of day for that matter. I often marvel at those these days who claim that they are “fully hedged”. And then try not to laugh. But that’s just the financial stuff. The insidiousness of the printing of money with abandon has metastasized a lot further than most will acknowledge. It is way beyond stealing our nest eggs, enslaving our college-age kids, oppressing savers and those retirees who planned but who are now screwed. It is beyond making the cost of education a joke. It is beyond even the tough call many families must be making at dinner time and when it’s time to buy 4 pair of sneakers. It has made its way into our lives by invading us at the State and municipal levels. To where courtrooms are being shut down, DPW workers laid off and teachers jettisoned by the droves. And now it’s time to talk about how this money printing stuff really works. Here’s the lay of the land; you paint me the picture! The S&P 500 is +11.79% year to date. Meanwhile, these headlines in the last 72 hours: “Indiana public schools announce 150 layoffs”. City of Massillon to lay off 27.” “Elyria School District (Ohio) announces 45 job cuts.” “Long Beach City College plans to lay off 55 as well as reduce contracts.” “Cobb County school budget: Fewer teachers, more crowded classrooms and fewer school days.” (If the Cobb County budget passes, 400 jobs are eliminated, 350 of them are teachers. Cobb County is in Georgia.) Just as a validation, Cobb County is one of the many who point to uncollectable ad valorem taxes as well as State cuts that have pinched County coffers. (Which in turn, pinch the municipalities.) This goes on day in and day out. And as we have been harping, has been accelerating noticeably lately. City workers, public safety officers, county health nurses, police, fire, school workers from administrative to teachers to custodians, bus drivers and cafeteria workers.
Were there existing problems with many of their contracts and retirement packages that became untenable? Indeed. Could these issues have been addressed and settled amicably with the private sector who funds these salaries/packages? Likely not. Nevertheless, the cutting is deep and painful and whether we want to accept it or not, less police, less teachers, less libraries, less courtrooms, less hours at City Hall and less road maintenance workers are not insignificant developments. So over the last 4 years, we have witnessed the fall-out from the “contained” housing collapse whip its way thru every nook and cranny of employment in the private sector and now is having a real go at the public sector. (I make it like this: the private sector laid off too many. Hired some back. And is now letting some go again. Wall Street is a good example. Conversely, the public sector didn’t lay enough off the first go ‘round and so now are forced to make a second round of cuts. Deeper cuts. Either way you slice it, we still have about 25 million Americans underemployed, whether they are counted or not!) Here it is again, get set to blurt it out: Yet the S&P 500 is +11.70% on the year. And the NASDAQ is up almost 20% in the same period. High Frequency Traders dominate the scene. (I heard but cannot confirm that a major house puts it at about 84% or some such wild level.) With mutual fund goobers yanked in as they are contractually-bound to get return. And we still have about 25 million Americans underemployed. And about $15.7 bil of national debt and climbing. And a deficit of about $1.4 tril heading the same way. We have about $13 tril of mortgage debt; $870 bil of student debt and $795 bil of credit card debt. (My eyes start to cross when I espy these figures. Yours?) Yet the FED has expanded its balance sheet by huge: $2.7 bil. And the markets have benefited handsomely. Yet we still have a big unemployment problem, a rising cost of living and massive personal debt. How the hell can that be in light of the flood of money? Congratulations, you figured it out: Printing money is highly beneficial for some and woefully destructive to most. Qui bono? We have harped in this space for years that if you are either a money center bank or high on their list of big, swingin’ prime brokerage accounts. Who get to jam the numbahs 24:7, then you are slick. We used to see a coupon pass go thru and then sit back and wait for stocks to
rally near the end of the day. It was like clockwork. And very obvious what was going on. Now with the overt printing of money, multiply that effect by any multiple you choose! But don’t very low borrowing rates enthuse corporations? Indeed they do. The BIG ones anyhow. Who can more easily survive economic downturns. What low rates mean to them is issuing paper cheaply and then using the moola to buy back shares or to buy equipment to take advantage of a depreciation bonus while it lasts. And nothing about hiring employees. As for the effect of low rates on small biz who do the bulk of the jobs creation, there is none. For the simple reason that they are not nearly as equipped to weather economic downturns. So two things here: they either cannot or will not borrow money right now, so the rates don’t mean jack to them. The best they can do is pull in their horns and ride it out. If they can. And you can scratch jobs creation off their list of things “To Do” until further notice. As a matter of fact, it has dawned that eventually, even the financials themselves suffer with rates so low. A pesky thing called compression of Net Interest Margins. An occupational hazard when playing a game called “Operation Twist”. (I wonder aloud some times what they THOUGHT would happen. Hello?) So where does this all leave us? At the brink, natch. If we choose to stick with the hard-line, neo-Keynesian policies that the FED is hell-bent on pursuing, then we are gonna’ go off a cliff without a doubt. Not tomorrow, for sure. But the devastation that is in the works for a future date will be revealed to us in due course. I’m thinkin’ specifically about the worthlessness of a fiat currency. And how that dandy realization is gonna’ play out. Probably in the streets. On the other hand, if Bernanke gets booted and the FED reorganized for lack of a more colorful term such as “disbanded”, we could then set about to pursue a monetary policy with a proven track record. There will be a severe amount of pain and adjustment necessary on all our parts. The first and hardest obstacle to overcome, I am thinking, is going to be the resumption of personal responsibility. In lieu of a nanny state which we can no longer afford to fund. Is this going to happen as I describe/hope? Not a chance in hell. Best thing we can hope for is modest, gradual change, but with a stern hand at the ready. I am absolutely confounded as to why and how we allowed The Bernank to run amok for so long. And only over this last week, are more pundits starting to take up criticism of the FED chair for misguided policy. It just does not work; he has it all backwards. Consumption does not make things percolate; Production is the key. The trouble is, he won’t accept that and worse, won’t stop experimenting to prove his academic theories. And is doing a great deal of harm in the process.
The housing implosion was bad enough. The mishandling of the aftermath was a disaster. Which has resulted in the rest of US society being mugged on a daily basis by a misguided, brazen, appointed academic. I am furious. And more so as I watch this market levitate at the hands of juiced-up HFTs. And wonder why the … we haven’t already marched on DC. And demanded an end to the systematic destruction of the United States. Because as stated at the outset, they can build a pipeline from here to the moon. They can give out free birth control at the candy store. They can close our borders. Or declare amnesty for illegal aliens. And support Syria. Or throw Israel under the bus. There is no outcome of any of the currently hotly-debated political issues that can even hold a candle to a FED gone Wild. Enough already. Time for Bambi and friends to go. Hasta manana. My head is now splitting.
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