Submitted by Peter Schiff of Euro Pacific Capital,

Most market watchers expect that Janet Yellen will grapple with two major tasks once she takes the helm at the Federal Reserve in 2014: deciding on the appropriate timing and intensity of the Fed’s quantitative easing taper strategy, and unwinding the Fed’s enormous $4 trillion balance sheet (without creating huge losses in the value of its portfolio). In reality both assignments are far more difficult than just about anyone understands or admits.
 
Unlike just about every other economist, I knew that the Fed would not taper in September because the economy is still fundamentally addicted to stimulus. The signs of recovery that have caused investors and politicians to bubble with enthusiasm are just QE in disguise. Take away the QE and the economy would likely tilt back into an even more severe recession than the one we experienced before QE1 was launched.
 
Given the Fed’s failure to initiate a tapering campaign in recent months (when it was highly expected) it is surprising that most people still believe that it will pull the trigger in the first quarter of 2014. But if the Fed could not take action in September, with Ben Bernanke at the helm and the nation as yet untraumatized by the debt ceiling drama and Obamacare, why should we expect tougher treatment from Janet Yellen? This is particularly true when you consider Yellen’s reputation as an extreme dove and the uninspiring economic data that has come in recent months. 
 
Rather than explicitly describing the possibility of a reduction of asset purchases, recent Fed statements have merely said that policy would be “adjusted” according to incoming data. It has never said what direction that adjustment may take. Yet somehow the market has concluded that an imminent reduction is the only possibility. But the opposite conclusion is more likely. Recession avoidance is really the Fed’s only concern and it will always come down on the side of accommodation. Therefore an expectation for a 2014 taper is just wishful thinking.
 
But that does not mean that QE will go on forever. It will come to an end, but not because the Fed wants it to, but because the currency markets give it no choice. A dollar crisis would ultimately force the Fed’s hand, and the longer the Fed succeeds in postponing the inevitable, the more damage its policy mistakes will inflict on our economy.
 
Yellen’s second task will be equally impossible. Since the QE campaign began in 2010 the Fed has more than quadrupled the amount of bonds that it holds on its balance sheet,to more than $4 trillion of Treasury and mortgage-backed bonds. To accumulate this massive cache, the Fed has become by far the largest buyer in both markets. Its purchases have pushed up the prices of those bonds and have kept long term interest rates low for both consumers and businesses.
 
When the QE was first launched, Ben Bernanke tamped down fears of the program by saying the Fed would one day sell the bonds that it was buying. But as the Fed’s balance sheet ballooned, many in the market began fearing that the unwinding of these trades would crush the market for Treasuries and mortgage-backed securities. Bernanke soon allayed these fears by saying that the Fed would not actively sell, but would simply allow bonds to mature. But this is just a convenient fiction.
 
If stock or real estate prices were to enter into bubble territory (which I believe has already happened), or if inflation were ever to surge past the Fed’s low target range (which I believe is certain to happen), then the Fed would have to sell bonds to get in front of these trends.
 
Through Operation Twist, the Fed has already swapped a very large portion of its short-term bonds for long-term bonds. The slow process of waiting for bonds to mature is unlikely to slow down asset bubbles or inflation. The argument also does not account for the fact that the Treasury will have to sell new bonds in order to retire the principle on the maturing bonds. Since the Fed is the primary buyer of Treasury bonds, the Fed would have to add to its balance sheet when it’s trying to shrink it. Such a cycle is just a debt rollover that leaves the size of the Fed’s balance sheet unchanged.
 
Unless other buyers of Treasuries or MBS can be found to replace the Fed’s prodigious buying, the Fed will remain the only game in town. Given these realities, how can we possibly expect Janet Yellen to actually diminish the amount of assets the Fed holds? She won’t be able to do it and any expectations to the contrary are pure fantasy.
 
So we should not be asking when Ms. Yellen will begin withdrawing stimulus and shrinking the Fed’s balance sheet. Instead we should be asking how the markets will react when she runs out of excuses for delaying the taper, or ultimately decides to expand QE rather than contract it.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/99qbKfST0pE/story01.htm Tyler Durden

Submitted by Peter Schiff of Euro Pacific Capital,

Most market watchers expect that Janet Yellen will grapple with two major tasks once she takes the helm at the Federal Reserve in 2014: deciding on the appropriate timing and intensity of the Fed’s quantitative easing taper strategy, and unwinding the Fed’s enormous $4 trillion balance sheet (without creating huge losses in the value of its portfolio). In reality both assignments are far more difficult than just about anyone understands or admits.
 
Unlike just about every other economist, I knew that the Fed would not taper in September because the economy is still fundamentally addicted to stimulus. The signs of recovery that have caused investors and politicians to bubble with enthusiasm are just QE in disguise. Take away the QE and the economy would likely tilt back into an even more severe recession than the one we experienced before QE1 was launched.
 
Given the Fed’s failure to initiate a tapering campaign in recent months (when it was highly expected) it is surprising that most people still believe that it will pull the trigger in the first quarter of 2014. But if the Fed could not take action in September, with Ben Bernanke at the helm and the nation as yet untraumatized by the debt ceiling drama and Obamacare, why should we expect tougher treatment from Janet Yellen? This is particularly true when you consider Yellen’s reputation as an extreme dove and the uninspiring economic data that has come in recent months. 
 
Rather than explicitly describing the possibility of a reduction of asset purchases, recent Fed statements have merely said that policy would be “adjusted” according to incoming data. It has never said what direction that adjustment may take. Yet somehow the market has concluded that an imminent reduction is the only possibility. But the opposite conclusion is more likely. Recession avoidance is really the Fed’s only concern and it will always come down on the side of accommodation. Therefore an expectation for a 2014 taper is just wishful thinking.
 
But that does not mean that QE will go on forever. It will come to an end, but not because the Fed wants it to, but because the currency markets give it no choice. A dollar crisis would ultimately force the Fed’s hand, and the longer the Fed succeeds in postponing the inevitable, the more damage its policy mistakes will inflict on our economy.
 
Yellen’s second task will be equally impossible. Since the QE campaign began in 2010 the Fed has more than quadrupled the amount of bonds that it holds on its balance sheet,to more than $4 trillion of Treasury and mortgage-backed bonds. To accumulate this massive cache, the Fed has become by far the largest buyer in both markets. Its purchases have pushed up the prices of those bonds and have kept long term interest rates low for both consumers and businesses.
 
When the QE was first launched, Ben Bernanke tamped down fears of the program by saying the Fed would one day sell the bonds that it was buying. But as the Fed’s balance sheet ballooned, many in the market began fearing that the unwinding of these trades would crush the market for Treasuries and mortgage-backed securities. Bernanke soon allayed these fears by saying that the Fed would not actively sell, but would simply allow bonds to mature. But this is just a convenient fiction.
 
If stock or real estate prices were to enter into bubble territory (which I believe has already happened), or if inflation were ever to surge past the Fed’s low target range (which I believe is certain to happen), then the Fed would have to sell bonds to get in front of these trends.
 
Through Operation Twist, the Fed has already swapped a very large portion of its short-term bonds for long-term bonds. The slow process of waiting for bonds to mature is unlikely to slow down asset bubbles or inflation. The argument also does not account for the fact that the Treasury will have to sell new bonds in order to retire the principle on the maturing bonds. Since the Fed is the primary buyer of Treasury bonds, the Fed would have to add to its balance sheet when it’s trying to shrink it. Such a cycle is just a debt rollover that leaves the size of the Fed’s balance sheet unchanged.
 
Unless other buyers of Treasuries or MBS can be found to replace the Fed’s prodigious buying, the Fed will remain the only game in town. Given these realities, how can we possibly expect Janet Yellen to actually diminish the amount of assets the Fed holds? She won’t be able to do it and any expectations to the contrary are pure fantasy.
 
So we should not be asking when Ms. Yellen will begin withdrawing stimulus and shrinking the Fed’s balance sheet. Instead we should be asking how the markets will react when she runs out of excuses for delaying the taper, or ultimately decides to expand QE rather than contract it.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/99qbKfST0pE/story01.htm Tyler Durden

Speaking, ironically, at the Economic Club of Detroit in 1988, Ron Paul warns oh-so-prophetically of a coming economic crisis and the profound implications of the government’s fiscal and monetary program largesse.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mHZX5_pra2Q/story01.htm Tyler Durden

Submitted by Michael Snyder of The Economic Collapse blog,

The death of the dollar is coming, and it will probably be China that pulls the trigger.  What you are about to read is understood by only a very small fraction of all Americans.  Right now, the U.S. dollar is the de facto reserve currency of the planet.  Most global trade is conducted in U.S. dollars, and almost all oil is sold for U.S. dollars.  More than 60 percent of all global foreign exchange reserves are held in U.S. dollars, and far more U.S. dollars are actually used outside of the United States than inside of it.  As will be described below, this has given the United States some tremendous economic advantages, and most Americans have no idea how much their current standard of living depends on the dollar remaining the reserve currency of the world. 

Unfortunately, thanks to reckless money printing by the Federal Reserve and the reckless accumulation of debt by the federal government, the status of the dollar as the reserve currency of the world is now in great jeopardy.

As I mentioned above, nations all over the globe use U.S. dollars to trade with one another.  This has created tremendous demand for U.S. dollars and has kept the value of the dollar up.  It also means that Americans can import things that they need much more inexpensively than they otherwise would be able to.

The largest exporting nations such as Saudi Arabia (oil) and China (cheap plastic trinkets at Wal-Mart) end up with massive piles of U.S. dollars…

Instead of just sitting on all of that cash, these exporting nations often reinvest much of that cash into low risk securities that can be rapidly turned back into dollars if necessary.  For a very long time, U.S. Treasury bonds have been considered to be the perfect way to do this.  This has created tremendous demand for U.S. government debt and has helped keep interest rates super low.  So every year, massive amounts of money that gets sent out of the country ends up being loaned back to the U.S. Treasury at super low interest rates…

And it has been a very good thing for the U.S. economy that the federal government has been able to borrow money so cheaply, because the interest rate on 10 year U.S. Treasuries affects thousands upon thousands of other interest rates throughout our financial system.  For example, as the rate on 10 year U.S. Treasuries has risen in recent months, so have the rates on U.S. home mortgages.

Our entire way of life in the United States depends upon this game continuing.  We must have the rest of the world use our currency and loan it back to us at ultra low interest rates.  At this point we have painted ourselves into a corner by accumulating so much debt.  We simply cannot afford to have rates rise significantly.

For example, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has been much higher than that at various times in the past), we would be paying more than a trillion dollars a year just in interest on the national debt.

But it wouldn't be just the federal government that would suffer.  Just consider what higher rates would do to the real estate market.

About a year ago, the rate on 30 year mortgages was sitting at 3.31 percent.  The monthly payment on a 30 year, $300,000 mortgage at that rate is $1315.52.

If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage would be $2201.29.

Does 8 percent sound crazy to you?

It shouldn't.  8 percent was considered to be normal back in the year 2000.

Are you starting to get the picture?

We need other countries to use our dollars and buy our debt so that we can have super low interest rates and so that we can afford to buy lots of cheap stuff from them.

Unfortunately, the truly bizarre behavior of the Federal Reserve and the U.S. government over the past several years is causing the rest of the world to lose faith in our currency.  In particular, China is leading the call for a "de-Americanized" world.  The following is from a recent article posted on the website of France 24…

For decades the US has benefited to the tune of trillions of dollars-worth of free credit from the greenback's role as the default global reserve unit.

 

But as the global economy trembled before the prospect of a US default last month, only averted when Washington reached a deal to raise its debt ceiling, China's official Xinhua news agency called for a "de-Americanised" world.

 

It also urged the creation of a "new international reserve currency… to replace the dominant US dollar".

So why should the rest of the planet listen to China?

Well, China now accounts for more global trade than anyone else does, including the United States.

China is also now the number one importer of oil in the world.

At this point, China is even importing more oil from Saudi Arabia than the United States is.

China now has an enormous amount of economic power globally, and the Chinese want the rest of the planet to start using less U.S. dollars and to start using more of their own currency.  The following is from a recent article in the Vancouver Sun…

Three years after China allowed the yuan to start trading in Hong Kong’s offshore market, banks a
nd investors around the world are positioning themselves to get involved in what Nomura Holdings Inc. calls the biggest revolution in the $5.3 trillion currency market since the creation of the euro in 1999.

And over the past few years we have seen the global use of the yuan rise dramatically…

International use of the yuan is increasing as the world’s second-largest economy opens up its capital markets. In the first nine months of this year, about 17 percent of China’s global trade was settled in the currency, compared with less than one percent in 2009, according to Deutsche Bank AG.

Of course the U.S. dollar is still king for now, but thanks to a whole host of recent international currency agreements this status is slipping.  For example, China just recently signed a major currency agreement with the European Central Bank…

The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.

 

"It's a way of promoting European and Chinese trade, but not doing it with the U.S. dollar," said Brooks. "It's a bit like cutting out the middleman, all of a sudden there's potentially no U.S. dollar risk."

And as I have written about previously, we have seen a bunch of other similar agreements being signed all over the planet in recent years…

1. China and Germany (See Here)

2. China and Russia (See Here)

3. China and Brazil (See Here)

4. China and Australia (See Here)

5. China and Japan (See Here)

6. India and Japan (See Here)

7. Iran and Russia (See Here)

8. China and Chile (See Here)

9. China and the United Arab Emirates (See Here)

10. China, Brazil, Russia, India and South Africa (See Here)

But do you hear about any of this on the mainstream news?

Of course not.

They would rather focus on the latest celebrity scandal.

Right now, the global move away from the U.S. dollar is slow but steady.

At some point, some trigger event will likely cause it to become a stampede.

When that happens, demand for U.S. dollars and U.S. debt will disintegrate and interest rates will absolutely skyrocket.

And if interest rates skyrocket that will throw the entire U.S. financial system into chaos.  At the moment, there are about 441 trillion dollars worth of interest rate derivatives sitting out there.  It is a financial time bomb unlike anything the world has ever seen before.

There are four "too big to fail" banks in the United States that each have more than 40 trillion dollars worth of total exposure to derivatives.   The largest chunk of those derivatives is made up of interest rate derivatives.  In case you were wondering , those four banks are JPMorgan Chase, Citibank, Bank of America and Goldman Sachs.

A huge upward surge in interest rates would absolutely devastate those banks and cause a financial crisis that would make 2008 look like a Sunday picnic.

Right now, the leader in global trade seems content to use U.S. dollars for most of their international transactions.  China also seems content to hold more than a trillion dollars of U.S. government debt.

If that suddenly changes someday, the consequences for the U.S. economy will be absolutely catastrophic and every single American will feel the pain.

The standard of living that all of us are enjoying today depends largely upon China.  They can bring down the hammer at any moment and they know it.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/xaS_69VFWJ0/story01.htm Tyler Durden

When one steps back from all the frustration, all the confusion,  all the failures both in the rollout and the mass behavioral experimentation, and the fact that the math just doesn’t work, the primary stated purpose behind Obamacare was simple: to provide uniform, affordable (the A in ACA) healthcare for all Americans. But especially to those who are currently uninsured. At least such was the utopian, egalitarian vision behind its conception. Which is also why, stripping away the political posturing, the html coding errors, the funding issues, the biggest failing of Obamacare would be if it opened, and none of America’s uninsured came. Sadly, this last nail in Obamacare’s coffin, has just been confirmed with a just released Gallup poll which found that a tiny 18% of uninsured Americans – the primary target population for the exchanges – have so far attempted to even visit an exchange website.

Additionally, Gallup previously found that less than half of uninsured Americans (44%) who plan to get insurance say they will do so through an exchange, and about one in four say they are more likely to pay a fine instead of getting insurance. “These findings help explain the low percentage of the uninsured who have attempted to access the exchange websites.”

Actually, Gallup’s last sentence is not factually correct: a satisfactory number Americans have visited the exchange websites, whether due to morbid curiosity or for another reason. It is how few of them have gone through the hassle of signing up (such as just one person in the case of North Carolina) that is the most disturbing, and puts the outright failure of Obamacare’s primary goal in question.

Gallup adds:

Still, the fact that less than a quarter of uninsured Americans who say they plan to get insurance through an exchange have visited one so far suggests that other factors are at work. It may be that many uninsured Americans are waiting to try out the health exchange websites until their highly publicized problems are fixed, or they may simply be putting off decisions about getting insurance until later.

Elsewhere, CBS reports that while the survey doesn’t say why uninsured Americans aren’t visiting the marketplaces, the ongoing technical problems on HealthCare.gov and some state-based sites have likely been a factor. The Obama administration has said that HealthCare.gov should be running smoothly for the “vast majority” of Americans by the end of November. It won’t be. And even when fixed it is unlikely that ultimately enrollment numbers, especially among young people, will surge to the threshold level that would be considered sustainable for this ponzi scheme to survive.

Once the site is fixed, the administration is planning a more aggressive media campaign to encourage more people to sign up for plans on the marketplaces. Administration officials also say they expect many people to put off enrollment until the last minute.

The administration has yet to release figures on just how many people have enrolled in insurance on the new marketplaces so far. However, the incremental reports that have been released so far aren’t encouraging. Sens. Chuck Grassley, R-Iowa, and Orrin Hatch, R-Utah, on Friday released enrollment data from the four insurance companies in the Washington, D.C. marketplace showing that just five people in the District have enrolled so far.

 

“With numbers like these, it’s no wonder the Obama Administration hasn’t wanted to release how many people have signed up for ObamaCare,” Hatch said in a statement. “Whether it’s significant problems with the website, people being forced off the coverage they had or skyrocketing costs, these numbers are even more proof of what a disaster ObamaCare is and why it should be delayed.”

 

The senators said the new mandate requiring people to obtain insurance starting in 2014 should be delayed as Obamacare problems are addressed. At least one Democrat agrees — Sen. Joe Manchin, D-W.V., on Thursday joined Sen. Mark Kirk, R-Ill., to introduce a bill that would delay the mandate until 2015.

 

The administration has said that people have plenty of time — another five months — to sign up. However, the administration is working with state insurance commissioners, CBS News chief White House correspondent Major Garrett reports, to try to help at least some people who have been dropped from insurance plans that don’t meet new Obamacare coverage standards. The administration is attempting to tweak regulations, Garrett reports, to help people who were dropped from their plans but now only qualify for plans they can’t afford.

 

At an event in Atlanta Friday, Health and Human Services Secretary Kathleen Sebelius reportedly said on the issue, “We’re looking at a number of options where there may be an opportunity for that number of people to look at plans that they have right now. But there isn’t any specific proposal at the table immediately.”

A fully functional rollout of healthcare.gov by the November 30 deadline will not happen, that much is clear. But what is most ironic about the whole situation is that it was the delay of Obamacare that was the primary impetus behind the Tea Party’s shutdown of the government. Paradoxically, if Obama had yielded or even negotiated, the ongoing rollout debacle would not exist, as much more time would have been implemented to fix all the glitches, while letting the conservatives foot the blame. Instead, with every passing day that Obamacare is nothing but a (not so fat) pipe dream, the president’s rating keeps dropping.

But worse than Obama’s approval (and disapproval) rating, will be what will happen if, in the 11th hour as usual, all of the young, uninsured potential Obamacare users simply do not show up.

That would indeed be the ultimate fiasco from which no matter how many sophomorically-written, teleprompted daily speeches of lilting grandure Obama gives, there would simply be no walking away from.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/rKwaG3r0vNI/story01.htm Tyler Durden

When one steps back from all the frustration, all the confusion,  all the failures both in the rollout and the mass behavioral experimentation, and the fact that the math just doesn’t work, the primary stated purpose behind Obamacare was simple: to provide uniform, affordable (the A in ACA) healthcare for all Americans. But especially to those who are currently uninsured. At least such was the utopian, egalitarian vision behind its conception. Which is also why, stripping away the political posturing, the html coding errors, the funding issues, the biggest failing of Obamacare would be if it opened, and none of America’s uninsured came. Sadly, this last nail in Obamacare’s coffin, has just been confirmed with a just released Gallup poll which found that a tiny 18% of uninsured Americans – the primary target population for the exchanges – have so far attempted to even visit an exchange website.

Additionally, Gallup previously found that less than half of uninsured Americans (44%) who plan to get insurance say they will do so through an exchange, and about one in four say they are more likely to pay a fine instead of getting insurance. “These findings help explain the low percentage of the uninsured who have attempted to access the exchange websites.”

Actually, Gallup’s last sentence is not factually correct: a satisfactory number Americans have visited the exchange websites, whether due to morbid curiosity or for another reason. It is how few of them have gone through the hassle of signing up (such as just one person in the case of North Carolina) that is the most disturbing, and puts the outright failure of Obamacare’s primary goal in question.

Gallup adds:

Still, the fact that less than a quarter of uninsured Americans who say they plan to get insurance through an exchange have visited one so far suggests that other factors are at work. It may be that many uninsured Americans are waiting to try out the health exchange websites until their highly publicized problems are fixed, or they may simply be putting off decisions about getting insurance until later.

Elsewhere, CBS reports that while the survey doesn’t say why uninsured Americans aren’t visiting the marketplaces, the ongoing technical problems on HealthCare.gov and some state-based sites have likely been a factor. The Obama administration has said that HealthCare.gov should be running smoothly for the “vast majority” of Americans by the end of November. It won’t be. And even when fixed it is unlikely that ultimately enrollment numbers, especially among young people, will surge to the threshold level that would be considered sustainable for this ponzi scheme to survive.

Once the site is fixed, the administration is planning a more aggressive media campaign to encourage more people to sign up for plans on the marketplaces. Administration officials also say they expect many people to put off enrollment until the last minute.

The administration has yet to release figures on just how many people have enrolled in insurance on the new marketplaces so far. However, the incremental reports that have been released so far aren’t encouraging. Sens. Chuck Grassley, R-Iowa, and Orrin Hatch, R-Utah, on Friday released enrollment data from the four insurance companies in the Washington, D.C. marketplace showing that just five people in the District have enrolled so far.

 

“With numbers like these, it’s no wonder the Obama Administration hasn’t wanted to release how many people have signed up for ObamaCare,” Hatch said in a statement. “Whether it’s significant problems with the website, people being forced off the coverage they had or skyrocketing costs, these numbers are even more proof of what a disaster ObamaCare is and why it should be delayed.”

 

The senators said the new mandate requiring people to obtain insurance starting in 2014 should be delayed as Obamacare problems are addressed. At least one Democrat agrees — Sen. Joe Manchin, D-W.V., on Thursday joined Sen. Mark Kirk, R-Ill., to introduce a bill that would delay the mandate until 2015.

 

The administration has said that people have plenty of time — another five months — to sign up. However, the administration is working with state insurance commissioners, CBS News chief White House correspondent Major Garrett reports, to try to help at least some people who have been dropped from insurance plans that don’t meet new Obamacare coverage standards. The administration is attempting to tweak regulations, Garrett reports, to help people who were dropped from their plans but now only qualify for plans they can’t afford.

 

At an event in Atlanta Friday, Health and Human Services Secretary Kathleen Sebelius reportedly said on the issue, “We’re looking at a number of options where there may be an opportunity for that number of people to look at plans that they have right now. But there isn’t any specific proposal at the table immediately.”

A fully functional rollout of healthcare.gov by the November 30 deadline will not happen, that much is clear. But what is most ironic about the whole situation is that it was the delay of Obamacare that was the primary impetus behind the Tea Party’s shutdown of the government. Paradoxically, if Obama had yielded or even negotiated, the ongoing rollout debacle would not exist, as much more time would have been implemented to fix all the glitches, while letting the conservatives foot the blame. Instead, with every passing day that Obamacare is nothing but a (not so fat) pipe dream, the president’s rating keeps dropping.

But worse than Obama’s approval (and disapproval) rating, will be what will happen if, in the 11th hour as usual, all of the young, uninsured potential Obamacare users simply do not show up.

That would indeed be the ultimate fiasco from which no matter how many sophomorically-written, teleprompted daily speeches of lilting grandure Obama gives, there would simply be no walking away from.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/rKwaG3r0vNI/story01.htm Tyler Durden

“People are, once again, being fooled,” fears Bill Fleckenstein in this brief CNBC clip, warning that investors buying into the stock market at all-time highs here are making a grave error. Investors are ignoring fundamentals at their peril, “in the stock mania in 1999, people were bullish because stocks were going up. In 2007, people were bullish because stocks and real estate were going up. They didn’t look ask – Why are they going up? Is this sustainable? Is this healthy? – and in both cases, it was not.” In the current environment, the bubble Fleckenstein points to is powered not by tech stocks or real estate, but by the Fed’s quantitative easing program. But, he warns, the Fed is losing control of one key market…

 

 

“Now we have the Fed suppressing the bond market such that rates are ridiculously low, and capital is being misallocated everywhere, and the price of nearly everything is out of whack,” Fleckenstein said.

But he says the Fed is starting to lose control already – meaning that stocks could crack even if the Fed continues to buy $85 billion worth of assets each month.

“Interest rates on the 10-year bonds have risen 100 basis points since last spring, and there’s still no tapering,” Fleckenstein noted.

“So why have bond rates risen? I think the Fed is no longer able to dictate where the bond market is going to trade. If that’s the case – and I say ‘if’ – then the game is going to change prospectively, because if the Fed loses control of the bond market, it’s not going to be able to have unilateral say in where assets trade.”
Specifically, Fleckenstein is watching the 3-percent level on the 10-year yield very closely.

“If the bond market trades through 3 percent in the absence of some superstrong economic data or an actual tapering, then it will be clear that something is radically different,” Fleckenstein said.

So once things do change, how low can the market go?

Without getting specific, Fleckenstein said the stocks will head “a lot lower, and enough lower to make people really unhappy.”

 

Via CNBC Futures Now

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/wNX-8bT7VPw/story01.htm Tyler Durden

“People are, once again, being fooled,” fears Bill Fleckenstein in this brief CNBC clip, warning that investors buying into the stock market at all-time highs here are making a grave error. Investors are ignoring fundamentals at their peril, “in the stock mania in 1999, people were bullish because stocks were going up. In 2007, people were bullish because stocks and real estate were going up. They didn’t look ask – Why are they going up? Is this sustainable? Is this healthy? – and in both cases, it was not.” In the current environment, the bubble Fleckenstein points to is powered not by tech stocks or real estate, but by the Fed’s quantitative easing program. But, he warns, the Fed is losing control of one key market…

 

 

“Now we have the Fed suppressing the bond market such that rates are ridiculously low, and capital is being misallocated everywhere, and the price of nearly everything is out of whack,” Fleckenstein said.

But he says the Fed is starting to lose control already – meaning that stocks could crack even if the Fed continues to buy $85 billion worth of assets each month.

“Interest rates on the 10-year bonds have risen 100 basis points since last spring, and there’s still no tapering,” Fleckenstein noted.

“So why have bond rates risen? I think the Fed is no longer able to dictate where the bond market is going to trade. If that’s the case – and I say ‘if’ – then the game is going to change prospectively, because if the Fed loses control of the bond market, it’s not going to be able to have unilateral say in where assets trade.”
Specifically, Fleckenstein is watching the 3-percent level on the 10-year yield very closely.

“If the bond market trades through 3 percent in the absence of some superstrong economic data or an actual tapering, then it will be clear that something is radically different,” Fleckenstein said.

So once things do change, how low can the market go?

Without getting specific, Fleckenstein said the stocks will head “a lot lower, and enough lower to make people really unhappy.”

 

Via CNBC Futures Now

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/wNX-8bT7VPw/story01.htm Tyler Durden

TedBits – Newsletter

View online Forward TedBits Newsletter November 8, 2013   Send To A Friend | View as PDF | View Past Articles | Subscribe WITCHES BREW: The Policies of Insolvency! (PART VI) Bankrupting America – When leverage fails Rarely, if ever, have I seen this level of INSANITY UNFOLDING in over 30 years watching and analyzing GLOBAL macroeconomics, politics and markets.  To say it is frightening is to understate the combustible nature of the world economy and its ability to genera te future growth and prosperity.  It can’t and won’t grow without massive reform of governments and their policies, which contrary to public opinion are deepening this MAN-MADE disaster.  Conversely, times of great danger and risk offer the most outstanding investment opportunities if you can SEE IT and prepare yourself properly. “There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently.” – Ben Graham The battle lines are clear; on one side of the BATTLE are the most powerful people and elites in the world, led by the Federal Reserve (Bernanke, Yellen and Co.), Bank of England (Mark Carney), and ECB (Mario Draghi).  Combined with their partners in the public sectors in the capitals of the developed world:  Washington DC (Barack Obama and congress), London (David Cameron and the city), Brussells (European commission) and let’s not leave out Beijing, Tokyo and Germany.  On the other side of the fight are Mother Nature and Darwin: the apostles of history. In the long run, Mama Nature and Darwin have never lost this war ever, but in the short run men can appear to be IN CHARGE.  In charge of the titanic that is.  It is quite clear that the powers that be think they can EXTRACT any amount of blood, treasure and toil and the world will continue to grow.  Nothing could be further from the truth and we await the societal & economic collapse for which they are laying the foundations.  Foundations which will be extremely hard to remove and undo as they are embedded in law and the people who must undo them are the same people that CREATED them.  Only a crushing blow will roll back the insanity and the future that is coming at us like a freight train. The socialists in disguise in the developed world’s capitals have put their constituents on a modern version of the RACK and are turning the wheels VIGOROUSLY.  These elites are Blind ideologues and will INFLICT any AMOUNT of MISERY on their constituents at the point of their regulatory and tax guns to achieve their ambitions of control over others. A lot of ink has been spilled on the Healthcare.gov failures but the impact that is unfolding is far DEEPER for the future of the world’s greatest economy and its private sector.  The affordable care act (ACA) is the antithesis of its title: it is wholesale destruction of the healthcare industry and the lives of those who rely upon it.  It is everything that socialism is: misery spread widely and less HEALTH care for (crony capitalism) much more money, it is very large doses of poison into people’s lives and futures. You must understand that control of people’s lives through control of their healthcare has been a progressive goal (both from the left and the right) for many, many decades.  Our system of checks and balances between the various branches of governments and congress has prohibited this dream from being realized.  UNTIL the 2008 election that is, when in a stroke of coincidence gave veto proof majority’s  and progressives captured complete and total power of the US government.  The acceleration of central planned economies and theft of private property through printing press and RUNAWAY regulation was multiplied EXPONENTIALLY, now those balls which began rolling then are hitting the economy like a tip of an iceberg. “A crisis is a terrible thing to waste” – Rahm Emanuel They didn’t let it go to waste as they justified their legislative and executive branch actions as necessary to SAVE you.  Unfortunately for us, all they inserted political solutions which served their lust for power over others, the money and themselves rather than practical solutions which serve all the public at large. The moral and fiscal INSOLVENCY of the financial system was on plain display at that time.  Now we are seeing the moral and fiscal insolvency of the system that allowed it to unfold. As thinly disguised Socialists and Marxists ascended to unbridled power, the total remaking of our institutions was PUT in PLACE.  Illinois is one of the epicenters of democratic/socialist corruption and it is on plain display to its residents and onlookers from around the nation, and they rose to power on a national scale 2008.  That political corruption took the driver’s seat of the national government at that time. In Illinois, laws are routinely ignored and political foes are destroyed from the misuse of government power.   Crony capitalists are generally the only groups which are allowed to thrive and POLITICIANS GUIDE IT ALL as divided government has gone the way of the DO DO bird (extinct), thus corruption is unrestrained.  The results are predictable: an economy in free fall with those in charge PREYING upon those who aren’t, at the point of a government gun.  California and New York are in the SAME BOAT.  These are the places which will be at the vanguard of economic failure in the United States.  It is why I recently left Chicago for Florida: to escape the unfolding destruction of my families’ future.  Most every country in the OECD is in secular decline as centrally planned socialist economies FAIL under their redistributionist policies.  No matter where you look, socialist states are in various stages succumbing to their moral and fiscal insolvency.  Argentina, Brazil, Italy, Greece, Portugal, France, Spain each have implemented the same policies, some are further down the path to their demise/chaos and others a just a few steps behind in the SAME process.  Some still have the ability to print money and other don’t.  It is why the EURO is doomed as those countries which can’t print must regain the ability to do so or, quite simply, the elites will be destroyed.  Above all else, the euro is a device to transfer power from local governments to Brussels in exchange for the printing press which they NEVER REACH.  Sooner or later, the local socialists will break away, recover seignoriege or experience an “off with their head” moment. We all live in something for nothing societies where the majority of the people think they can live at the expense of the PRODUCTIVE minority and they have firm grips on our elected offices.  The governments of the developed world are good reflections of the MAJORITY of their constituents: lazy, thieving, dumbed down, non-self-reliant, unproductive, unable to produce more than they consume, unable to do critical thinking and ignorant of history.   USEFUL idiots as Lenin called them.  But very dangerous as they are ripe for manipulation and can VOTE!   “A Nation of sheep breeds a government of wolves!” – Anonymous  “Any man who thinks he can be happy and prosperous by letting the government take care of him had better take a closer look at the American Indian.”   – Henry Ford   As government dependency caroms exponentially higher, the productive minority is ground under the demands of the majority.  They believe they are ENTITLED to the fruits of others labor and VOTE to extract it under the point of a government gun. They normally NEVER feel the cost of their impossible beliefs that they can live at the expense of others, but this time is DIFFERENT.  The affordable care act is hitting them right where it hurts: their incomes and well-being.  It now sets up the mother of all showdowns as the victim to victor ratio is enormous.  What is the victim to victor ratio you ask?  There are probably ten people who are badly damaged by the law compared to one person whose life is improved.  The victims are the very people the President got to vote for him to support the ACA.  Quoting Peggy Noonan – “They said if you liked your insurance you could keep your insurance – but that’s not true. It was never true! They said if you liked your doctor you could keep your doctor – but that’s not true. It was never true! They said they would cover everyone who needed it, and instead people who had coverage are losing it – millions of them! They said they would make insurance less expensive – but it’s more expensive! Premium shock, deductible shock.   They said don’t worry, your health information will be secure, but instead the whole setup looks like a hacker’s holiday. Bad guys are apparently already going for your private information. And now there are reports the insurance companies are taking advantage of the chaos of the program, and its many dislocations, to hike premiums. Meaning the law was written in such a way that insurance companies profit on it.” Now the president and progressives in congress are saying to everyone:  who do you believe?  Me or you’re lying eyes.  He is going to have a hard time pulling that over on the 4.6 million people who have received insurance pinks slips with millions more to come.  Do you really think it is a coincidence that millions are being forced out and into the ACA?  The very insurance companies who canceled them await them inside the exchanges with huge premium increases and deductibles.  This is intentional folks…   It is clear that as we learn what was in the ACA the more monstrous and pernicious it becomes. It is a regulatory and freedom destructive morass of Washington progressive and special interest WEASEL words.  It can be interpreted any way the Washington bureaucrats wish.  Regulations and sales of business to crony capitalists who wait in line to buy them through K street lobbyists.  Look at the volume of goods sold:  The ACA – whose intent is nothing what it has been presented as.  In something for nothing societies, the true impact of policies can never DIRECTLY impact the useful idiots who supported it or the truth becomes SELF apparent.  They can only touch them indirectly, so they cannot pin the tails of the donkeys who are preying on them: their leaders.   At the same time the president and his progressive supporters say he is going to “GRIND IT OUT”, and HHS secretary Sebelius says delay is: NOT an OPTION”.  Let me translate that for you.  Hell has arrived for millions and millions of people and blind ideologues are going to shove it down their throats.  To that I say:  good luck and welcome to Napoleon’s Waterloo for the progressives in congress who passed it without a single vote from across the aisle. It couldn’t happen to nicer people.  They can tell you that you are benefiting ‘til they are blue in the face; only their supporters look at their bank accounts to understand the truth.   If you think the US economy and you can escape the ACA, think again.   It is government control of 1/6th of the economy and of the most basic human needs.  The ACA is convulsing it and the convulsions have just begun. YOUR HEALTHCARE and you now are in the hands of the corrupt congress in Washington DC (District of Corruption).  Makes you feel warm and fuzzy doesn’t it? Authors Note: In my opinion, this is NOT Doom and GLOOM, it is one of the greatest opportunities in HISTORY. Invest properly for this outcome and Prosper, invest looking in the REARVIEW mirror and your wealth will be irreparably DAMAGED. Volatility is opportunity for the prepared investor. As it is priced in and markets ZOOM higher or LOWER to price in collapsing economies and money printing huge opportunities are created. Is your portfolio structured to thrive?  For a personal consultation with me CLICK HERE! Dodd Frank is every bit the economy killer that the ACA is, trust me I am in the financial industry and we are being MURDERED.  It is stealth blow every bit as bad as the ACA (chart courtesy of www.gordontlong.com) : Now let’s cover recent history and put an impact statement for you to consider concerning the national debt and paying for the something for nothing society we inhabit. Less than 1 month ago (distant memory now) a debt ceiling showdown and government shutdown (God forbid the something for nothings may have had to do something to supplement themselves) was in full bloom and the world was on the brink of disaster (those on the dole cut off from their benefactors within the beltway, and the government unable to print money thru QE), which when resolved supposedly everything was FINE.  Quoting the commander in chief: “Now, this debt ceiling — I just want to remind people in case you haven’t been keeping up — raising the debt ceiling, which has been done over a hundred times, does not increase our debt; it does not somehow promote profligacy. All it does is it says you got to pay the bills that you’ve already racked up, Congress. It’s a basic function of making sure that the full faith and credit of the United States is preserved.” – Barrack Obama Actually, the trouble was obscured from the public who is mostly dependents of government through a variety of programs too numerous to mention.  On the day of the debt ceiling resolution, the US debt mushroomed by approximately $329 billion dollars (329,000 million) or $1,061 dollars for every man woman and child in the U.S.   The administration has racked up $8 trillion dollars of debt since his inauguration not counting UNFUNDED entitlements.  For your information that is $25,806 dollars for every man woman and child in the U.S.  That goes with the $25,000+ dollars borrowed before the current administration in was elected and must be added to obligations which are off balance sheet of 5 times more (approximately $300,000 for every man woman and child in the country).  Do the math. Not one media source informed the public of this insidious fact.  Do you think 90 days of big government is worth this price to the public?  Why weren’t they informed?  Main stream Media blackout of the facts?  Say it ain’t so… Now on to the stock market where it’s become a party like 1999.  Insanity is the norm as it was then.  Tech companies with valuations in the tens of BILLIONS of dollars on companies with NO EARNINGS.   Nothing for sale but hot air, hype and the HOPE of monetizing future growth. The public and huge money managers are piling in with no fear, with record inflows happening as we speak.  Today’s Twitter IPO is valuing the company at roughly $30+ Billion dollars, more than the market value of over 337 S&P 500 companies, worth more than GM, John Deere and many more.  Stocks are floating higher with a direct correlation to the Federal Reserve’s EXPLODING balance sheet and the debasement of the currency the S&P is denominated in.   It doesn’t take a genius to buy this chart until it doesn’t work.   Take a look at the world’s most ugly and widely known chart courtesy of the chart store and Ron Griess; Do you think today’s stock markets are moving higher on fundamentals?   The ONLY fundamental driving this chart is $4.1 billion dollars and yen ($4,100 million) printed out of thin air on a daily basis and nothing else.  And a mania is in full swing (chart courtesy of www.cross-currents.net).  Too many dollars chasing too few destinations. Margin use is at record highs which have preceded every market crash in the past 15 years (courtesy www.cross-currents.net):  And bullish newsletter sentiment is at extremes seen at previous market tops:   And professional managers are holding extreme levels of long exposure: People have short memories, and today’s troubles obscure the recent past and why REAL economic growth CANNOT RESUME under current government policies IMPLEMENTED since the global financial crisis exploded at that time.  And the public is piling in, in a manner not seen since 2007: And the retail investor cash levels are now at extreme lows so buying power is now a Fed affair: With hedge funds approaching record net longs in the tech sector: Of course the main stream media tells the public “this time it’s different”.  HA HA… All I can say is someday soon it will be BOMBS away.  For these maniacal daredevils, the operative words at this point is “Don’t FIGHT the FED” and pray they keep it up.  Make no mistake: there will never be a taper, just ask Janet. In conclusion, as I said several weeks ago: the smell of napalm is in the air.  The only thing preventing an explosion is FIREHOSES of NEW money being poured on the fires of insolvency to keep them under control.  The purpose of this commentary is not doom and gloom, it is a fire alarm.  So you can better prepare yourself to avoid the fires and prepare yourself to benefit from them. Authors Note: In my opinion, this is NOT Doom and GLOOM, it is one of the greatest opportunities in HISTORY. Invest properly for this outcome and Prosper, invest looking in the REARVIEW mirror and your wealth will be irreparably DAMAGED. Volatility is opportunity for the prepared investor. As it is priced in and markets ZOOM higher or LOWER to price in collapsing economies and money printing huge opportunities are created. Is your portfolio structured to thrive?  For a personal consultation with me CLICK HERE! The crises are now never ending and broad credit growth to the private sector flat to down.  But, as I said, this is Mother Nature and Darwin versus the most powerful people on the planet. This is a battle royal to see who determines the face of reality.  The Keynesian illusionists or Mother Nature. You do not want to miss the n ext edition of TedBits.  Why not subscribe? Subscriptions are free! CLICK HERE. DISCLAIMER AND TERMS OF USE: While TedBits strives to present accurate and useful information, we make no guarantee of accuracy or completeness. All information and opinion expressed herein is subject to change without notice. Opinions and recommendations contained herein should not be construed as investment advice. Under no circumstances does the information in this column represent a recommendation to buy or sell any securities or commodities. Do not assume that any recommendations, insights, charts, theories or philosophies will ensure profitable investment. The information contained herein is for personal use only. Any redistribution of this information is strictly prohibited. Gold and silver backed means that various commodity options strategies in gold and/or silver may be used. When buying options, you may lose all of the money paid for the option. When selling options, you may lose more than the funds received for selling the option. Strategies using combinations of positions, such as spreads or straddles, may be as risky as taking a simple long or short position. A high degree of leverage is used to buy or sell a sufficient quantity of options and/or underlying futures contracts equal to the value of the entire portfolio. The high degree of leverage can work against you as well as for you and lead to large losses as well as large gains. Absolute-return is not meant to imply that a positive return can or will be achieved. Absolute-return describes investment strategies which are designed to have the potential to succeed in rising, market-neutral and falling market conditions. Gold and silver backed and absolute return investments do not mean the investor will take actual physical possessions of any precious metal. Nor should any promise or guarantee be implied that such investments will perform better than any other investment in any possible future scenario described herein nor that such investments can or will preserve or protect in such possible future scenarios. TedBits may include information obtained from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made to ensure its accuracy or completeness. Many of the statements and views made are the opinions of the author. Opinions expressed are subject to change without notice. This report is not a request to engage in any transaction involving the purchase or sale of futures contracts or options on futures. There is a substantial risk of loss associated with trading futures, foreign exchange and options on futures. This letter is not intended as investment advice, and its use in any respect is entirely the responsibility of the user. Past performance in never a guarantee of future results. You are currently signed up to The Ted Bits newsletters. To unsubscribe click here

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8DmIv0f7jmg/story01.htm tedbits

European monetary policy/monetary conditions are too tight and, Citi's FX Technical group explains, the EURO is too strong thereby exacerbating the effects of the internal devaluation in Europe (as we noted here). Looser monetary policy and a weaker currency are becoming increasingly necessary conditions for the Eurozone to recover/survive. The present period in the Eurozone, Citi adds, where the financial architecture is coming apart at the seams is not remotely unprecedented and in fact offers a very compelling historical perspective for significant devaluation of the EUR in the years ahead.

Via Citi FX Technicals,

Given the lack of economic growth and employment growth combined with the precipitous fall in the inflation rate since July last year the ECB should be embracing looser policy and a lower EURO.

The present period in the Eurozone where the financial architecture is coming apart at the seams is not remotely unprecedented

Quick history recap:

1989-1991: We had the savings and loan crisis in the US; a sharp down turn in housing activity and a deep economic recession

 

1992-1994: The “travails” in the World’s largest economy found their way into the “flawed” financial architecture of Europe (The Exchange rate mechanism) which collapsed under the stress

 

1997-1998: Saw the “third leg” of this dynamic feed into Emerging markets as the aggressive easing in the World’s major economic zones created a “bubble” in EM and in particular Asia. Between 1989 and 1992 the Fed lowered the Fed funds rate from 9.75% to 3%.(The USD-Index fell about 27% in this period) From 1992 to 1996 the Bundesbank lowered rates from 8.75% to 2.5%.(The cycle low was put in for the USD-index in 1992 in a similar fashion to 2008 when we also reached the cycle low in the Fed funds rate) Three years later we saw the USD-index begin a 5 year plus rally-something we believe started again in 2011.

USD-index and the Fed easing cycles (Fed funds) of 1989-1992 and 2007-2009 on the back of a housing downturn, banking stress and economic downturn

We continue to believe that we are close to the next rally in the USD-index which we expect to continue for the next 2-3 years.

When we look back to that period in the early 1990’s we see a number of stimulus dynamics that eventually helped Europe “regain its footing”

Firstly the peripheral states got two distinct elements of stimulus. Most of the ERM currencies continued to weaken against the DEM into March of 1995 as the excessively tight monetary regime (Short term rates) put in place to defend the currencies was abandoned. This was further assisted by the easing of official rates by the Bundesbank from 8.75% in 1992 to a low of 2.5% by 1996.

European currencies continued to weaken into early 1995 against the Deutsche Mark.

The Italian Lira, Spanish Peseta and French Franc (Amongst many others) weakened substantially against the DEM into the spring of 1995.(Internal FX devaluation in “Euro bloc”)

As they strengthened again from 1995 onwards the Bundesbank was still lowering rates

Long term rates then started to fall sharply from 1995 and spreads converged with Germany providing further stimulus.

This move lower generated a rapid convergence of Bond yields.

Take Italy for example: Between 1995 and 1998 the 10 year Italy-Germany spread narrowed from about 650 basis points to ZERO on the back of the convergence trade.

That provided a huge monetary stimulus at the long end of the curve (And did not even need QE to do it) the magnitude of this move was much greater than what we have seen since this spread peaked just under 2 years ago.

Between 1995 and 1999 not only did we see spreads converge but long term rates in Italy (10 year) fell from 13.8% to 3.9% (Almost 1000 basis points). Compare that to today where we have seen a high to low fall of about 380 basis points between 2011 and 2013

Further as mentioned above we then saw the EURO (As its components) drop from 1.3770 in March 1995 to .8200 by October 2000 (40%) and from a peak of 1.4900 seen in 1992 (45%). Between 1995 and 1997 the convergence trade saw European currencies strengthen against the DEM (internal devaluation) but lower long term yields, short term yields and a much weaker “EURO bloc” against the USD all provided strong offsetting monetary stimulus.

Huge external devaluation for the EURO “bloc”

Sharp fall in the EURO bloc against the USD from 1995 to 2000 and in particular the 2 years from 1998-2000 (Fall of 32%)

That 2 year fall is important for a few reasons

– It happened after we had seen pretty much the “lion’s share” of the stimulative benefit of the “convergence trade” and drop in long term yields into 1998.

 

– The cycle low in Bundesbank rates (2.5%) in 1996 and subsequently ECB rates (2.5% in 1999) had been met at this point

Therefore the currency became the last “vestige” of monetary easing in the post ERM crisis cycle.

So reviewing the Crisis and post crisis dynamics of the ERM collapse and comparing to today

European peripheral currencies got a massive “Euro bloc” devaluation from 1992-1995. For example the Italian Lira depreciated from around 750 against the Deutsche in 1992 to about 1,240 by 1995 (About 65%). Between 1995 and 1997 some of that was unwound (internal EURO bloc) as it retraced to around 990 which became the rate at which the EURO conversion took place. That was still a devaluation of 32% from the 1992 level. Today the internal exchange rate is fixed so Italy in this crisis has had no internal devaluation.

 

From 1995 to 1998/1999 Italian long term yields fell precipitously (1,000 basis points) and the spread with Germany went to ZERO providing huge stimulus. During today’s crisis Italian 10 year yields have fallen from a peak of around 7.5% in 2011 to a low of around 3.7% in 2013 and now sit over 4% while German 10 year yields are around 1.75%. By definition this is much less stimulus as well as less convergence.

 

The EURO came into existence in January 1999 and the ECB refinancing rate hit a cycle low at 2.5% by April 1999, a move lower from the “heady peak” Bundesbank discount rate of 8.75% in 1992 and by definition large short term monetary stimulus.(fall of 625 basis points). Today we have seen a
less stimulative fall from 4.25% to 0.5% over about 5 years (375 basis points with minimal future potential to fall from here)

 

Between 1995 and 2000 the “EURO bloc” devalued against the USD by 40% (45% since 1992). Today, if we use October 2009 as the start of this EURO crisis (The point at which peripheral yields led by Greece began to surge) EURUSD has gone from around 1.46 at that time to around 1.35 today (A net depreciation of only about 7.5%)

The bottom line here is that in all respects the stimulative post crisis dynamics this time have been much lower than those seen after a “lesser” crisis in 1992-1995.This is before we even talk about the excessive Government debt that now exists, the stresses in the European banking system, the default by Greece, the bailout of Ireland and Cyprus and the fiscal austerity measures being employed.

In addition there is minimal new stimulative potential from traditional monetary policy with ECB rates now at 0.5%.

This leaves really two major tools for further stimulative activity following this week's rate cut…

Renewed ECB bond buying (They can no longer rely on an LTRO transmission mechanism inducing financial institutions to buy European sovereign bonds especially as they have shown the propensity for haircuts when things go wrong)…this would likely then transmit into…

 

A sharp external devaluation of the EURO. Given the poor economic dynamics in Europe, the collapsing inflation, global feedback loop concerns regarding tapering, some concerns about the ability of China (A major export market for Europe and Germany in particular) to maintain the prior pace of economic growth etc. there should be no concern in Europe about this. The authorities have to stop viewing a weaker EURO as part of the problem (financial crisis) and more as part of the solution (External devaluation is stimulative to the MCI (monetary conditions index) and supports export led growth). Even Germany should embrace this given the sluggishness of the EURO area economies and sharply lower and falling inflation. When we look at the longer term EURUSD chart it is very supportive of this outcome in a fashion very similar to the 1995-2000 period.

URUSD monthly chart: A very compelling historical perspective

We continue to expect a significant fall in EURUSD over the next 2+ years as we saw in 1998.We believe Europe needs and should embrace this dynamic given the ongoing danger of a deep recessionary/depressionary/deflationary environment as a consequence of fiscal austerity and the sharp internal devaluation dynamics already seen.

Within this we believe Europe should (and ultimately will) embrace the stimulative effects of such a move in conjunction with further traditional (refinancing rate) easing (Albeit at these levels the move is more psychological than anything) and non-traditional (bond buying)

On top of this the position of both the relative economic and monetary policy dynamics leaves the US further down the road and closer to a potential turn than Europe (Despite those dynamics still being weak by historical recovery standards)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/uP0g2kNd47Y/story01.htm Tyler Durden