Tuesday, April 16, 2013

Global Financial Condition Cannot Be Sustained

Hyperbole aside, Monday's market events need to be taken in context with current conditions before examining the relief rally on Tuesday.

Stocks were close to record highs, advancing steadily from the November lows and putting the first three months of 2013 in frothy territory. A reversal - and not just a one-day, buy-the-dip kind of drop - was long overdue and is likely to continue because all economic data over the past three weeks have disappointed.

Eventually, stocks will coincide with reality, as they did on Monday, spurred on by China's announcement that their economy continues to slow. That news sent all Asian equity markets into a tailspin and put a negative tone on the European markets and eventually to the US as well. The slide was a global one, reflecting conditions that have even the usually-rosy IMF predicting slow global growth of around two percent, which is probably an overstatement.

Investors need to be aware of macro conditions that are causing disruptions and dislocations. China's continued courting of bi-lateral trade and currency deals with other nations - blunting US dollar hegemony - is an outlier, the impact of which should not and cannot be underestimated. The days of petro-dollar dominance are coming to an end and likely are occurring faster than those in "control" wish to consider. The ramifications of the US losing reserve currency status are deep and will put America in a non-competitive condition, not something that anyone is currently considering.

Japan's experiment with inflation may not be as seamless or painless as its architects will admit. The volatility since the beginning of the BOJ's massive buying spree is disrupting the carry trade of easy money. A slip-up or miscalculation - highly likely - could cause the target of two percent inflation to be overshot by a wide margin, spurring hyper-inflation and portending a worldwide financial calamity.

Thus, Monday's broad, massive, global selloff appears to be only the first volley from the forces of deflation, which, even with worldwide money-printing gone wild, is a relentless adversary.

As for the gold smack-down, the fingerprints of central bankers - especially our own Federal Reserve - are all over it. The rationale for the take-down of the precious metal can best be explained by two articles: one by Paul Craig Roberts, here, the other by Bill Downey at GoldTrends.net, here.

Broadly speaking, a dislocation between paper prices and physical metal on hand was causing a major problem which needed a creative, though underhanded and heavy-handed solution.

The timing of the bomb blasts in Boston could not have been more prescient for markets, as the tragedy put all other news on back burners, to the point that none of the three nightly network news shows even made mention of the stock market travails or the plunge in gold and all other commodities. Regular scheduling on CNBC was pre-empted by network coverage from the scene of the crime. For the ill-informed, all they'll know is that stocks staged yet anothr miraculous rally on Tuesday, and that all is well in the world at a time when the wheels of industry and finance are practically falling off, wheeling out in all sorts of odd directions.

Sooner or later, governments and their financiers simply can't fake it any more. Today's network whining over the "tax gap" of $500 billion annually being under-reported or not reported at all is only a symptom of the malady of over-taxation. People just have to "cheat" just to get by, and, with the numbers of food stamp recipients rising to all-time highs, the government is a willful participant in pushing people over the edge and into the "underground" economy, which has flourished since 2000 and especially since 2008.

Governments are bloated with debt and false promises, their central bankers morally, intellectually and financially bankrupt. The system will implode or explode. Different countries will have different results, though most will suffer deepening and discouraging depression and deflation. Central banks have printed over $25 trillion in fresh money since 2008, shoring up the balance sheets of zombie banks in the US, Europe and elsewhere, but the money has not flowed beyond the banks' vaults.

Financial repression will continue until massive dislocations can no longer be ignored. Financial reporting by major firms is mostly fraudulent, as many firms have bought back massive blocks of stock, making their earnings per share comparisons easy, but, eventually, weaker than the headline numbers being touted.

Wall Street may be waking up to the fact that revenue growth simply is not happening and that current levels will be difficult to maintain.

These are just a few of the issues facing global financial tinkerers. At some point, they will not have answers when problems confront them. Their time is running out.

Keep a close eye on the new highs - new lows. When that rolls over and there are more new lows than new highs for more than three days, it could be the first signal that the bull market is over and the bears are about to claw the market to pieces. That indicator has bee widely in favor of new highs for a long time, but recently has tightened, with the gap closing significantly on Monday and Tuesday.

Dow 14,756.78, +157.58 (1.08%)
NASDAQ 3,264.63, +48.14 (1.50%)
S&P 500 1,574.57, +22.21 (1.43%)
NYSE Composite 9,082.58, +128.63 (1.44%)
NASDAQ Volume 1,447,797,375
NYSE Volume 3,740,603,750
Combined NYSE & NASDAQ Advance - Decline: 5111-1368
Combined NYSE & NASDAQ New highs - New lows: 137-87
WTI crude oil: 88.72, +0.01
Gold: 1,366.40, +5.30
Silver: 23.34, -0.016

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