Sunday, June 16, 2013

QE=quicksand exit...L&C

The stock market had a down week as one important indicator trumped the known knowns while another one is simmering in the background. The Oracle of Omaha cannot always be trusted to speak the truth nowadays, but in unscripted moments his inner soul bursts out. He reminded the Fed that anyone can buy bonds, however selling them is the tricky part. Bond rates rose over 4% and this was the real force in bringing down the market.
Investors had jumped on the train of rising home prices, coupled with low rates. This added to the positive impact in the economy and GDP. Suddenly, the train hit an obstacle on the track. Higher prices means less buyers. Higher rates means lower prices. Together, it spells trouble. Let me remind you what boomers learned about credit and what young adults are doing today with credit.
In the past our egos were stroked by the credit card industry offering new cards everyday in the mail. We could buy anything: cars, clothes, take a vacation, whatever. This was Friday afternoon. With Monday's mail came the bill tagged with 18% interest or more. Never again!
Today, the rate of young people not owning a credit card has doubled compared to boomers at their age. The kids listen after all. They will be better for it with their finances.
In the World
countries use bonds to finance everything. The problem is most have abused the system because offering bonds is easy, paying them off is hard. Added into the equation new bonds are offered to pay back past bonds utilizing the concept of rollover. Governments can recall a past bond at 6%, put it into a new bond of 3% and skim off some money to make ends meet. What this is is a version of robbing Peter to pay Paul.
Argentina, US and many, many more have dipped into this pool on Friday only to suffer the hangover with Monday's mail. The Fed and central banks all use some sought of quantitative easing to lower rates, so their governments can find money to operate and keep the status quo. The problem surfaced when these bureaucrat's decided that their economies needed new revenues and the best way to get new money is through taxes. No one will sponsor taxes, but jobs do it for them. Everyone pays taxes on income. Jobs increase income. 
comes in many forms and currency manipulation is on top of the list. A lower currency means more exports. Japan decided to outdo the Fed with its own form of QE. It would debase the Yen. The yen went from 95 to 103 in a few weeks. This is a monster move and behind the scenes, the derivative market I think, was about to explode. Last week, the yen is suddenly back to 95. Why? There was a crisis, but it was kept out of the media. Nevertheless, this change in currency in such a short period of time resulted in interest rates moving upwards. This is the one area where central banks do not have control and control is key here. If rates hold at this level, it means higher rates are coming. Higher rates spell trouble for the stock market and the global market. The Fed will seek to calm the market next week, but there is one aspect that they cannot change. Money left our treasury notes to the tune of $37billion last week. This is big and like the Titanic, these moves, once started, cannot turn on a dime and weave away from a new iceberg that just appears. No one wants to be standing when the music stops. No one wants to own something that is sinking in value. Why would you hold a 3% note when you can get 4% or more? The Fed built a house of low rates on quicksand, and like I have stated repeatedly, they do not have an exit strategy. The market picked up this idea like Monday's mail.
Liars and Crooks: President Obama says he will help the rebels in Syria with small arms. President Johnson said he would help South Vietnam with advisers, military aid and then, ten years of death not to mention one trillion in debt. The rebels have my sympathy, but this is their revolution, not ours. Ours is taking place in Detroit which had 1.8 million people in 1950 and today, 701,000 and that is being kind. One-third are in poverty because of the lie of free trade. According to American Water Works Association, there is a water pipe break somewhere in the US every TWO MINUTES! We need leaders to face the truth at home. I have an answer for our water problem, but who is JFL? He didn't go to an Ivy League school and worse, he went to Catholic school. We cannot allow him a platform to speak. It could ruin everything. This is why we need an evolution in our democracy. The rule makers pass rules demanding an oath of allegiance and then, violate the law. Edward Snowden will suffer for speaking out for a higher oath, the one the Founding Fathers fought for. End the Fed!