Our Macro Watch Liquidity Gauge analysis continues to suggest that 2nd Half 2014 will experience a liquidity problem, despite the Fed's recent Reverse Repo actions, unless the Federal Reserve halts the "TAPER" program schedule in Q3 / Q4 2014. Failure to do this may turn out to be the "straw which finally breaks the "camel's back" of the post Financial Crisis Global recovery.
We are presently long overdue for a market correction which will challenge the Fed to stop it from being too deep so as to effect overleveraged collateral values we have been warning of fopr sometime and the tenuous situation in the shadow banking system where treasury fails have become common.
This is not going to end well, but not before the Federal Reserve is forced into even more dramatic departures from proven Monetary Policy practices. Global Central Bankers are presently highly concerned, but have not yet reached the "panic reaction" stage we expect to see before this monetary experiment tragically ends.
The US economy is steadily deteriorating and continues to be artifically supported by only government deficit spending and a historic growth in the Federal Reserve Balance Sheet. These measures are clearly failing to create sustainable economic growth. Q2 is highly likely to turn out to be a negative growth quarter simialr to Q1 which has been revised lower to - 2.6%. Two consequtive negative quarters defines a recession. Markets will soon react negatively to this realization.
We continue to see major issues in the US Housing market which has begun rolling over, HELOC loan deliquency levels, residual used car values, lower credit scores for new debt, accerating deterioration in retail sales, crumbling capex, weak startup/small business growth and chronic unemployment which is only seeing growth in part time work within poor paying sectors.
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I spent a lot of time in 2012 and 2013 talking about Monetary Malpractice and where it would lead. I discussed extensively the consequences of Moral Hazard and Unintended Consequences and how they could lead to Dysfunctional Financial Markets.
I additionally showed how Misinformation & Manipulation of CPI Inflation measures, GDP deflators and Labor Statistics was Monetary Malpractice and how it would lead to Malfeasance, Mispricing and Malinvestment as the Price discovery process was corrupted. The Mispricing of Risk would be a logical consequence.
I just published an Analytic Insights paper entitled “The Delusional High - When Reality, Misguided Perceptions & Delusion Intersect“which can be linked to from our commentary page of GordonTLong.com.
I illustrate that Deceptions of all types, if sustained over longer periods of time, usually lead to Distortions which in turn lead to Delusional expectations.
Specifically, how Reality moves to Misguided Perceptions which inevitably results in Pure Delusion.
This is exactly where we said we would eventually end up when we talked about Monetary Malpractice.
This is precisely where we are now! -With Dysfunctional Markets, Malinvestment and Pure Delusion.
These are pretty harsh statements, so let me back them up with the facts.
By almost any measure the equity markets are historically over extended and are at levels that have ALWAYS resulted in serious corrections. But this time it is different!
Don’t get me wrong, the markets are going to experience a near term scare, but nowhere near what should occur because of unprecedented changes to the markets that have gone almost unnoticed..
$2T in Corporate Buybacks has occurred or is estimated to occur in 2013 and 2014 due to what is the biggest tax loophole in corporate history.
There is a shortage of available stock as central banks and 400 public institutions are now buying stock and reportedly hold over $29T in trading stock assets.
The Federal Reserve has slyly engineered over $150B of potential liquidity injections via Reverse Repos to be able to stop any serious collapse in equity or bond prices and their collateral values.
This does not mean the markets won’t correct! The Central Banks actually want this on a controlled basis to drive bond prices up (and most importantly, yields down) as 10,000 baby boomers in the US alone retire per day. Retirees are increasingly stopping payments of mandatory entitlement expenses and are now starting to collect them. Additionally, as they stop contributing to their separate private retirement assets, they are starting to draw them down.
The Fed has successfully engineered a massive increase in the wealth effect, but now must engineer a controlled bond rotation. Anything can go wrong in such as undertaking. Stock yields are now so poor that even dismal bond yields appear attractive and relatively safer. If anyone yells ‘fire’ in this crowded room and we will have panic bond buying. The last time occurred in 2007, nominal yields on T-Bills went negative as people paid for safety.
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Macro Watch is a video newsletter published quarterly by Richard Duncan. It analyzes trends in credit growth, liquidity and government policy in order to anticipate their impact on economic activity and asset prices.
In this new age of fiat money, credit growth drives economic growth, liquidity determines the direction of asset prices and the government controls both through aggressive policy intervention.
Macro Watch analyzes trends in credit growth, liquidity and government policy with the goal of anticipating economic developments and their impact on the financial markets.
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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
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