Enjoy the weekend. Its gorgeous out here in Baltimore.
Gold
Bottom Line:
As you can see, there was a price to pay after spending money that we don't have. The Fed can't have its cake and eat it too. Prices on commodities soared as the dollar weakened.
We have seen both sides of the QE dilemma this week folks. The Fed is now facing their own financial version of the Vietnam War. I say this because its I war that I don't think the Fed can win because either way the economy crumbles.
Here is why:
If the Fed QE's and starts buying up the bond market the dollar gets killed as the world continues to lose confidence in the USA and our currency. The falling currency then results in huge spikes in prices which then suffocates the consumer with higher prices.
We all saw what happened to the consumer when we had $4 gas last year. They basically rolled over as the cost of everything skyrocketed. Hybrids and motorcycles popped up out of nowhere and SUV's were nowhere to be found.
Oil is now back up to around $66 dollars a barrel after bottoming in the 20's. This is a direct result of the weaker dollar. I say this because demand is NOT driving this. There are supertankers of oil that have nowhere to go because the world economies have collapsed thus killing demand. However, since oil is priced in US dollars, oil has spiked up as the dollar dropped.
The same thing goes for gold and many other commodities. Folk, if the Fed continues to spend like drunken sailors, no one is going to be able to afford to live let alone go out and consume as a result of crippling inflation. The economy will then collapse because the consumer drives 70% of our economy.
If the Fed decides not to QE:
Well, last week we saw a little of what will happen if the Fed stops their QE policy and the FCB's stops buying bonds. Yields will soar and our government will be forced to stop spending as their ability to finance their debt via selling treasuries will disappear.
This then decimates the housing market which then destroys the trillions of $$$ in assets on the bank's balance sheet. As these banks start to collapse again following further deterioration on their balance sheets, the Fed will not have the money to save them as a result of the treasury market blowing up.
Without the ability to continue the bailouts, the corporations that have survived only by sucking off the government tit would then implode and the Fed would be pretty much powerless to stop it. We would then see an unprecedented wave of corporate bankruptcies as their financial wells run dry.
The end result is pretty similar to scenario #1: Economic Collapse.
The best thing the Fed could do at this point is get the hell out of the bond market and stop all of the bailout spending.
I mean jeez: If they reduced the deficits by increased taxes and reduced spending there would be no need for QE! Would this be an extremely painful scenario ala the 1930's? Hell yes, but at least the economic system and our government would be kept in tact.
The game the Fed is playing is unsustainable and guaranteed to fail.
Its time to take our medicine before we lose the economic system that has allowed us to become the most powerful country on earth.
What's it gonna Ben? A depression followed by a recovery or Zimbabwe and social chaos?
How on earth is anyone going to ever pay this debt back? Where is the money going to come from? Mars?
Answer: It won't be paid back. The problem we have here is our economy cannot grow until all of this debt is either paid off or defaulted on. Our consumer led economy simply cannot grow when the consumer doesn't have the ability to spend.
Bottom Line:
This will not end pretty. Whenever bubblevision talks about all of the "cash on the sidelines " come back here and take a look at this chart. Cash is on "the sidelines" because its being used to payoff record debt levels.
The now 9% deliquincy rate on mortgage payments combined with massive foreclosures, record invetories, and higher interest rates will only mean one thing: THE DEATH OF THE HOUSING MARKET AND OUR ECONOMY.
Every week all I hear about on CNBC is how they are signs of recovery. Housing supposedly is stabilizing and the banks balance sheets our now supposed to now be strong.
Gimme a break! How can they say this with a straight face?
If prime mortgages foreclosures continue this trend(and there is no reason to believe they won't) the banks are going to get slaughtered as their loan books become filled with millions of bad loans resulting in billions if not trillions of more $$$ in losses.
Green shoots? All I see is one giant housing weed.
My Take:
My Take:
It doesn't get any uglier than this guys and girls. Where in the hell are you supposed to put your money as equities and bonds both sell off at the same time?
ANSWER: ITS MATTRESS TIME!
Sad but true. I would make sure that you hedge any treasury holding's that you have. You can do this by shorting TLT or by buying ticker TBT. If the long end treasury auctions blow up next week it could be lights out for the bond market. I wish I was kidding folks. Unfortunately, I am as serious as a heart attack.
The fact that the bond market is collapsing this early in the year is STUNNING to me. We still have trillions of $$$ in treasuries to sell throughout the rest of the year. Who in GOD'S NAME is going to buy it? I am starting to have doubts that we make it through the summer with out a bond dislocation/collapse.
What's also frightening was watching the MBS securities also sell off today. The spread between Fannie debt and treasuries has narrowed to razor thin margins. The bond sell off triggered a massive sell off in MBS because the spread got too narrowed.
This was the one area of the bond market that was still performing.
All in all folks, everyone sold everything today: STOCKS AND BONDS. Scary stuff.
Bottom Line:
Buy yourself an extra thick SEALY and tuck some money away. As for for the rest of your wealth thats in "digital dollars" via CD's/treasuries, stocks, and 401k accounts? Just hold onto them and pray that you can liquidate them into cash down the road if TSHTF.
The rise in mortgage/treasury yields are going to absolutely decimate whats left of the housing market because interest rates are going to SOAR.
We could very well see mortgage rates hit 6% by next week and no that's not a misprint. That's how bad treasuries have sold off.
How is anyone holding a $500-$750,000 McMansion going sell now as rates soar? They couldn't sell the damn thing with 4% rates. There is now a 40 month inventory for houses in this price range and this was BEFORE we saw the bond blowup this week!
Higher rates will be the final nail in the coffin for anyone selling in this price range. Housing in general is simply going to be destroyed by higher mortgage rates.
Obama, its time to IMMEDIATELY put the breaks on your spending binge or you risk destroying this nation economically.
THE BOND MARKET HAS SPOKEN: ARE YOU LISTENING?
My Take:
Basically all hell is breaking loose in the bond market. Here is the problem boys and girls: The bond auctions went well today because they were 2 year auctions meaning that the bonds were on the short end of the curve. This is where everyone wants to be because they mature quickly. This quick ROI makes them one of the safest places to be in the treasury market. As a result, the auctions went well.
Where investors don't want to be is stuck in the long end holding 30 year bonds! The rest of the auctions this week are 5 and 7 year treasuries. There will be not be as much demand for these bonds because they begin to lean closer the longer end of the yield curve in the treasury market. Across the curve is suggesting tonight that a long tail on the 5 or 7 year bond auctions later this week could mark the beginning of the end for treasuries.
The fact that the our bailout obsessed president just dumped another $30 billion into GM wasn't exactly soothing for the bond market. The Fed must be in a panic after seeing what happened in the credit markets today.
Bottom Line
The gates of hell could open wide if the 5 and 7 year auctions don't sell well. The panic sell off in treasuries late today should be considered to be extremely ominous.
This rally today was based on consumer sentiment which came in way above expectations. Hell, even I was impressed. However, remember, sentiment is just sentiment. Sentiment doesn't buy a car or a house. It just means people are feeling more optimistic.
Meanwhile, back here on earth, our economy continues to collapse. The March Case/shiller report was a pefect example of this:
"May 26 (Bloomberg) -- Home prices in 20 major metropolitan areas fell more than forecast in March as foreclosures surged, threatening to extend the housing slump.
The S&P/Case-Shiller home-price index decreased 18.7 percent from March 2008, matching the drop in the year ended in February. The measure declined 19 percent in January, the most since data began in 2001.
Record foreclosures are depressing the value of other properties, contributing to a slump in household wealth that is hurting consumer spending and the economy. Still, falling prices and mortgage rates have made homes more affordable, helping to stem the slide in sales, which will eventually help prices stabilize.
“The housing market still has somewhat of a ways to go before it completely bottoms,” Celia Chen, an economist at Moody’s Economy.com in West Chester, Pennsylvania, said in an interview on Bloomberg Television. “Prices I think still will fall a little bit further.”
Bottom Line Continued
I thought housing was stabilizing? BB told us that the they were seeing signs of stabilization in the economy dammit! Gee, do you think perhaps he lied?
As you can see there are no signs of stabilization. The only sign I see here is one that reads: FREEFALL! Housing prices were down almost 19% down versus March of last year. Yuck.
Remember folks, the economic crisis cannot end until housing stabilizes. Most of the bad assets on the banks books are bloated McMansion mortgages. Dropping housing prices mean only one thing to the banks: MORE LOSSES!
What can I say folks? We are spending too much money that we don't have, and this house of cards is about to come tumbling down. The credit markets are trying to warn you that its coming. We have moved from 2.4% up to over 3.5% on the 10 year in less than 2 months. Whats amazing is this is happening at a time when the Fed buying treasuries via QE! This is a parabolic move that may be signalling that a bond dislocation could be right around the corner.
The equity market told you the wrong story today folks. Moves in equities based on consumer sentiment telling you "happy days are here again" are moves that I ignore.
The real story happened in Chicago. I am amazed at how these pump monkeys can take the market higher in the face of such bad news.
I mean its amazing: GM is bleeding money and going BK, the bond market went berserk going into the close over concerns around our credit rating, and housing once again dropped to all time lows.
So what do stocks do in response to all of this? Move higher because consumer sentiment came in above expectations! These poor saps buying stocks have no clue that they are jumping into a pit filled with rattlesnakes.
Stay Tuned!