Bracing for An Eventual Day of Reckoning
by Stephen Lendman
Financial markets today reflect a total disconnect from reality. Former Reagan administration Office of Management and Budget director, David Stockman, calls the Fed “a serial bubble machine.”
“It’s only a question of time before central banks lose control,” he warns. He expects “panic when people realize that (market) values are massively overstated.”
They’re “extremely dangerous, unstable, and subject to serious trouble and dislocation in the future,” he stresses.
The Fed is responsible for “exporting lunatic policies worldwide.” All bubbles burst. They end badly. For sure this one. It’s a whopper. It’s just a matter of time until all hell breaks lose.
Market analyst Graham Summers sees dangerous equity market topping signs. They include:
- margin debt hitting new all-time highs;
- bearish sentiment at all-time lows;
- market leaders peaking or approaching it;
- declining market breadth;
- earnings are falling; and
- equities “diverg(ing) dramatically from earnings and revenues.
Topping takes longer than many people expect, said Summers. Recent market movements aren’t “promising.”
“(F)or certain we are in a bubble. It’s just a question of when it bursts.”
Economic Collapse blog.com discussed 2014 forecasts by noted analysts. They warn about next year “shak(ing) America to the core.” They may be right or wrong.
Money printing madness kept party time going longer than most analysts expected. Eventually good times end.
On December 13, the Wall Street Journal headlined “Markets Get Set to Lose a Crutch,” saying:
“Investors are bracing for the Federal Reserve to reduce its market-boosting stimulus as soon as the coming week…”
Next Wednesday, Fed governors meet. They’ll “decide the fate of (their) $85 billion monthly bond-buying” binge.
So-called tapering may be announced. If not now, perhaps early next year.
Harry Dent expects “another slowdown and stock crash accelerating between very early 2014 and early 2015.” He expects more trouble later on.
Marc Faber warned investors early. He did so numerous times before. He’s doing it again, saying:
“You have to say that we are again in a massive financial bubble in bonds, in equities, in (other) asset prices that have gone up dramatically.”
Mike Maloney calls the 2008 crash “a speed bump on the way to the main event.” The consequences will be “horrific,” he warns.
“(T)he rest of the decade will bring us the greatest financial calamity in history.”
Jim Rogers said “what happened in 2008-2009 (was) worse than the previous economic setback.”
It’s because “debt was so much higher.” Now it’s “staggeringly much higher.”
Whenever the next market disruption comes, it’s “going to be worse than in the past,” he stresses.
It’s “because we have unbelievable levels of debt, and unbelievable levels of money printing all over the world.”
“Be worried and be prepared,” he warns. He doesn’t know when trouble will arrive, he says. “(B)ut when it comes, be careful.”
Robert Shiller is worried. At the same time, he’s “not sounding the alarm yet.” Stock price levels are high. So are other financial assets. Things “could end badly,” Shiller warns.
Economics Professor Laurence Kotlikoff said:
“Eventually somebody recognizes (what’s happening), and starts dumping their bonds, and interest rates go up, and inflation takes off, and were off to the races.”
Michael Pento said Washington “brought us out of the Great Recession, only to set us up for the Greater Depression, which lies on the other side of interest rate normalization.”
Russel Napier believes we’re “on the eve of a deflationary shockÃ¢â‚¬¦” It’ll “likely reduce equity valuations from very high to very low levels.”
Market strategist Robert Farrell is best remembered for his “10 Market Rules to Remember:”
Number one: markets (always) return to their mean average over time.
Number two: excesses in one direction lead to opposite ones.
Number nine: when conventional wisdom agrees, “something else is going to happen.”
Gerald Celente publishes his annual top 10 trends. He calls 2014 “a year of extremes.” His number one trend is “March Economic Madness.”
Timing is one of the toughest aspects of forecasting, he said. No one knows precisely when things will happen. Often they’re when few expect them.
Celente “missed the mark with (his) Crash of 2010 prediction,” he admitted. Why, he asked? Because of worldwide money printing madness.
It was unprecedented. Who could have predicted it? It can’t last. Celente believes “around March, or by the end of” 2014 Q II, “an economic shock wave will rattle” world equity markets. It remains to be seen if he’s right this time.
Market analyst Market Weiss calls the US economy so addicted to Fed money printing madness “that just the thought of withdrawal (causes) market convulsions.”
Since crisis conditions erupted in 2008, Bernanke made one excuse after another. He did so irresponsibly.
He “smash(ed) the 100-year Fed prohibition against running the money printing presses 24/7,” said Weiss.
First he claimed conditions left him no choice, saying:
“Unless we flood the banking system with money, megabanks will fail and global financial markets will collapse in a heap of rubble.”
When the worst of crisis conditions eased, his “new rationale” was “trillion-dollar federal budget deficits year after year,” said Weiss.
Former Troubled Asset Relief Program (TARP) head Neil Barofsky believes Wall Street perhaps got around $23 trillion.
Hundreds of billions more went to troubled European banks. Perhaps they’re still getting plenty. Open checkbook Fed policy assures Wall Street whatever it wants.
Fed policy reasons that “(u)nless we buy Treasuries (and mortgage-backed) securities by the truckload, the deficits will smash the bond markets and sabotage the economic recovery?”
What recovery? It landed on Wall Street. It benefitted America’s super-rich. It missed Main Street. Protracted Depression era trouble persists.
Ordinary people struggle daily to get by. Many never had things worse. Improvement is nowhere in sight.
A “long line-up of excuses” kept Fed policy “pedal to the metal on its giant money presses,” said Weiss. Fed chairwoman elect Janet Yellen promises more of the same.
Things improved from earlier, she said. They haven’t done so “enough.” The “not improved enough” mantra is the theme heading into next year.
Before Lehman Brothers collapsed in 2008, the Fed’s monetary base was $849.8 billion. On October 30, 2013, it exceeded $3.6 trillion.
It expanded over threefold in six years. It did what no one thought possible. It did what honest analysts called irresponsible. According to Weiss:
If the Fed expanded the monetary base at the same pace it’s done since 1961, “it would have taken nearly 150 years to come this far.”
Pre-2008, expanding the monetary base rapidly occurred only two other times:
- ahead of potential Y2K trouble; and
So far, post-2008 monetary madness exceeded Y2K expansion 43-fold. It’s nearly 70 times larger than post-9/11 policy.
Most alarming, said Weiss, is that the Fed hasn’t “begun to resolve the underlying diseases” responsible for earlier crises. It “merely papered over their symptoms.”
They fester and grow. They’re worse than ever. They assure eventual day of reckoning trouble.
The 2008 crisis resulted from excessive debt, derivatives and other toxic financial assets, unprecedented wealth concentration among powerful institutions, and reckless speculation fueled by monetary madness and near-zero interest rates.
Total credit market debt keeps rising. In 2008, it was $53.5 trillion. Through 2013 Q II, it’s $57.6 trillion.
The notional value of derivatives held by US banks grew from $175.8 trillion in September 2008 to $231.6 trillion this year.
According to the Office of the Comptroller of the Currency (OCC):
“Derivatives activity in the US banking system continues to be dominated by a small group of large institutions.”
It names four megabanks. They include JP Morgan Chase, Bank of America, Citibank and Goldman Sachs. They control 93% of all banking industry derivatives.
Massive federal deficits persist. So does Europe’s debt crisis. Money printing madness doesn’t resolve things.
It kicks the can down the road. It does so irresponsibly. It creates greater problems ahead. It papers over what desperately needs addressing now. It needed it years ago.
Weiss thinks the only Fed solution is “panicky retreat.” Consider history, he says. Fed policy created bond market trouble in the 1970s.
In 1979, Treasury bonds rose to 13% yields. T-bills to 17%, and the prime rate to 21%.
In the early 1990s, Fed policy kept short rates lower than normal. In 1994, things changed. The largest ever modern era calendar year decline in bond prices occurred.
Alan Greenspan wasn’t noted for accurate forecasts. Weeks before the 2000 market peak, he claimed:
“The American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits and stock prices at a pace not seen in generations, if ever.”
It was reminiscent of noted economist Erving Fisher. Shortly before the 1929 crash, he fell from grace. He did so claiming economic fundamentals were strong.
Stock market prices were undervalued, he said. An unending era of prosperity lay ahead. It took over a decade to arrive. It took WW II to deliver it.
For years into the new millennium, Greenspan let growing financial trouble fester. In January 2006, he retired.
Ben Bernanke replaced him. Business as usual continued. Lehman Brothers collapse followed. So did hard times for millions. Things were never better for Wall Street.
Money printing madness continues. How will things change this time? Watch for telltale signs, Weiss advises.
He promised to discuss them as they occur. The moment of truth approaches. No one knows for sure when it’ll arrive. It always did before. It will this time.
Watch bond prices. They’re experiencing the biggest interest rate reversal in 37 years, says Weiss. Yields are rising.
How high remains to be seen. If history is a guide, the worst is yet to come.
Rising bond yields spell trouble for stocks. It remains to be seen how bad things eventually get.
Note: On December 17, Fed governors announced tapering. Monthly bond buying will be reduced from $85 billion to $75 billion on January 1.
Interest rates will remain near zero. Whether further tapering continues next year remains to be seen. So will how markets react going forward.
Wednesday they celebrated. Bubbles have a way of bursting when least expected. This one imploding is long overdue.
Stephen Lendman lives in Chicago. He can be reached at firstname.lastname@example.org.
His new book is titled “Banker Occupation: Waging Financial War on Humanity.”
Visit his blog site at sjlendman.blogspot.com.
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