Monday, November 1, 2010

The Calm Before the Storm

What a volatile day.

The robots managed to rally us back to even in the last hour after a violent sell earlier in the afternoon following the JP Morgan news.

Today and tomorrow I expect the market to spend most of it't time obsessing about the Fed and their statement. Predictions and rumors will be flying all over the place as we head into perhaps the most anticipated Fed statement in history.

The way I see it, the world changes forever once the QE2 button is pushed.  When it is announced, you must assume that this train wreck we call our economy can't be fixed.  The Fed is basically telling you that they see no way out of this.

I say this because they know QE2 can't work.  They have already tried it once and saw how it worked out.  The bankers made a fortune(what else is new) as they used the money to speculate instead of lending it.

The Fed was able to buy a lot of MBS's with QE1 which propped up the housing market for a year.  None of this didn't fixed our problems.  Unemployment continued to rise and housing prices continued to fall.  All it did was delay the inevitable pain.

The Fed knows QE is not a solution.  They saw what happened in Japan after they had conducted multiple QE's.  They know that Japan has still not recovered after 21 years. 

They watched Japan's currency turn into toilet paper in the process.  They also see Japan's debt to GDP ratio sitting at 200% which is the highest of any developed nation.

Since we all know today that Japan's drive down the QE highway was a complete failure you then have to assume that the Fed is basically preparing to tell us that they have officially given up. 

I would have a lot more respect for them if they came out and told us the truth regarding QE.  I wish they would all stand before us on Bubblevision and announce: "Fellow citizens, we are officially screwed.  As a result, we have decided to extend and pretend by financing ourselves hoping that it buys us a few more years before we blowup".

Of course this will never happen.  I am sure the Fed statements will be filled with lots of banking mumbo jumbo about how this will help keep rates low which will then stimulate lending blah blah blah....

The reality is, at best, it delays the banks from going bankrupt.  However, it does absolutely nothing positive for Main St.  Absolutely NOTHING!!!

I guess if you a masochist who loves watching people starve to death as prices soar as a result of our eventual currency crisis then you might be a QE2 fan.

The Bottom Line

"The credit trader" has always told me from the beginning that all Wall St cares about is money.  Nothing else matters.  He also says that it's only gotten worse over time.  According to him when someone made $5million they then wanted $10 million.  If someone made $500 million they had to then get to $1 billion.

It's never enough according to him and I now believe he is right.  The market has already priced in QE2 and it's already been painful.  Commodities have soared and corporations are already talking about higher input costs cutting into profits.

The problem here is QE won't ever end the way I see it because we don't have the money to continue hiding the fraud that's seen everywhere in the form of losses on everything from commercial real estate to the bad loans on the banks balance sheets.

In order to continue hising this monstrosity we will no doubt see a QE3 which will hurt us even more.  This will then be followed by QE4 will be even more painful and so on.

This is going to end very badly because there is going to be a point at which the markets realize that we can never pay back this money.  They will then respond by punishing our currency even harder than the QE's does,  and it will eventually end via a currency crisis.  Could it be hyperinflation?  It's very possible the way I see it.

I also realize that I am not smart enough to know how this all plays out.  I don't think anyone does.  "The credit trader" doesn't believe we have had a fundamental market since the early 1990's.  I have heard him say "none of this makes any sense" on multiple occasions. 

We talked about QE2 this weekend.

As we discussed the topic he stopped at one point when we were discussing the rally and looked at me and said "Jeff, How is QE bullish?".   I had no answer.

After that we both agreed to not even talk about the markets the rest of the night because the whole thing is so absurd.

We also concluded that there is pretty much no way out at this point.  The only real options are "extend and pretend".


A USA default which then includes a "reset" and the end of the day for the US dollar.

I guess when these are the only two options on the table "extend and pretend" doesn't look so bad after all. 

Wednesday will be a sight to behold.  The combination of the FOMC statement and a potential changing of the guard in both the Senate and the House will likely create one heck of a crazy day on Wall St. 

I think there is a high probability of a huge "sell the news" dump following the Fed's statement.  If it doesn't happen on Wednesday then I think we'll see it within the next few trading sessions.

The reason I say this is the market is going to eventually realize the QE2 will not work and if anything it's a sign of desperation.

After all if our deficit was manageable, and there was ample demand for our debt, then why would you attempt something so silly? 

All we can do at this point is hope that we all survive this nightmare relatively unscathed. 

In the end, I keep telling myself that the sun will rise just like it always does when this is all said and done no matter what the elites do from here on out.

I'll end tonight with a scene from the movie "Castaway".  I have always found this to be very inspiring.  I hope you enjoy it as much as I did:


getyourselfconnected said...

Great clip and great post.

On a roll as of late, keep it coming!

Jeff said...

Thanks Get

I got a late start tonight. Had a busy day

Anonymous said...

Hey Jeff, while on the subject, remember when QEI ended and you predicted 10yr rates would soon explode:

And then, remember when I called you out on it and you said:

"Talk to me in 6 months when the world realizes we are nothing more than another Greece."

That was fun wasn't it?

Anonymous said...

Hey anon...

Remember how every few weeks you come scurrying out of the woodwork like the scumbag roach you are?

Yeah. Thought so.

Anonymous said...

Awww wadda matter anon? Did I strike a nerve?

I dont know so much about "scumbag roach" but I would say "troll" is a bit accurate.

And as one, I can say nothing makes me happier than to see how my comment affected you so. Thank you for making my day!!!