FedUpUSA

Archive for December 9th, 2011

The global “shadow” banking system is unraveling, with dire consequences for  financial assets and failed policies.

We’re not used to things falling apart, and so our first reaction is disorientation.What we’ve been trained to expect by constant intervention in supposedly “open” markets is that Central States and central banks will “save the day” with a new intervention: an interest rate cut, a new round of money-printing, emergency loans, new bailout funds, the list has been almost endless since the initial evidence of the Great Unraveling  appeared in 2007.

So when official interventions are announced to great fanfare and then fail to goose the market, we’re disoriented.  John Hussman neatly summarized the insanity of a market propped up only by constant official manipulation:We represent the Lollipop Guild:

Frankly, I am concerned that Wall Street is becoming little more than a glorified crack house.Day after day, the sole focus of Wall Street is on more sugar, stronger sugar, Big Bazookas  of sugar, unlimited sugar, and anything that will get somebody to deliver the sugar faster.  This is like offering a lollipop to quiet down a 2-year old throwing a tantrum, and  expecting that the result will be fewer tantrums.What we have increasingly observed over the past decade is nothing but the gradual  destruction of the ability of the financial markets to allocate capital for the benefit of  future growth. By preventing the natural discipline of the markets to impose losses on  poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world’s policy makers are increasingly wrecking  the prospects for long-term economic growth.

The problem with depending on intervention “sugar” for sustenance is that the market slowly loses its sensitivity to the mechanisms of control (insulin), and at some point the sugar no longer generates a response.  We are very close to that point  now, as the expected “grand EU treaty agreement” is duly issued as expected and global markets are holding their breath, hoping that some new intervention will keep the teetering financial system from falling over the edge.

This is desperation.In market after market, participants don’t really have any faith in the future resilience of the fundamentals which supposedly underpin global markets; rather, they are desperately hoping the next intervention will work better than the last one. But  like insulin insensitivity, the market is on a one-way slide: every intervention works its magic for a shorter period of time, and markets respond with increasing torpor to the “fix.”

The next phase is chaos, as participants finally grasp that interventions will no longer save them.Then the mad rush to the exits (selling) will begin, and many will be trampled, as the bid will disappear across entire spectra of assets.

We should recall that nothing fundamental has changed since 2007.Here are two fundamentals of many which haven’t changed at all: wealth is still concentrated:

and the global financial system is still overleveraged and over-indebted, meaning that every decline in asset valuation triggers a “reverse wealth effect.”

As I type, the morning injection of hopium crack into the market’s veins is already wearing off. We are still in the desperation stage, as central bank manipulators and Central State apparatchiks are rushing around in a panicky search for some new supply of “sugar” intervention to prop up what has been unsustainable since 2007.

The manipulations have one ironic accomplishment: the resulting crash will be larger and more chaotic than the one in 2008 because the faith that State/central bank interventions are limitless magic will have been irrevocably lost.

Charles Hugh Smith – Of Two Minds

The EU summit “deal” is noise; we knew going in there would be no “grand bargain” and there isn’t.  Britain said “stuff it” (rightly so) along with a few others; those who went along did so pretty much at gunpoint.

The vassal state model may look attractive as an alternative to Mekosy, but they’re nuts.  What they’ll ultimately get out of this is a war.  Oh Archduke, is that you over there somewhere?

The internal issue for America is more-acute in the market sense.  Texas Instruments last night warned on weakening demand and got clocked in the aftermarket.  This morning Dupont issued a warning.  Either standing alone could be looked at as company-specific.  The two together cannot.

I said a bit over a year ago that PPI pressures would eventually filter through and hammer margins directly, and likely would result in cost-push pressures that ultimately would hurt the top line — although perhaps not at the firms that had the cost pressures.  In other words the deteriorating standard of living would eventually have to show up somewhere — “charge it” only works for a while.

It appears that it now is showing up.  This sucks, to be blunt, but it is very unlikely to be contained.

My macro-level view has not changed much; timing is everything in the markets and I still believe we’ll more-or-less hold together until late in December — another couple of weeks, and perhaps into early January, but in 2012 it’s going to come apart.

Those who think that we’ll get through the election will be wrong — I’ll go out on the limb and put that out there right now.  No chance folks — there’s not that much dry powder available to anyone.

As such consider your positions carefully if you’re long the market — the wild gyrations are a warning — overall “bullish” markets don’t behave this way, but ones that are about to fall apart sure as hell do.

I expect a very profitable 2012 — and not on the long side either.