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Business/Finance See other Business/Finance Articles Title: ADD: Attention to Deflation Disorder If Jim Rickards has told me once, he’s told me a thousand times… “Thanks to Twitter, our society is cursed with a two-second attention span. They expect everything to happen right away. Meanwhile, big events can take days, weeks, months, even years to slowly play out.” That mind worm wriggled in our heads, until we reached today’s diagnosis: Investors have ADD. “Attention to deflation disorder.” Not one day after David Stockman’s live training event, readers displayed all the symptoms. Emails started rolling in last night... “Hallo, Mr. Stockman,” wrote one (German?) reader. “What happened today on Wall Street is the opposite of your prediction so far. And the market is dicht always. Sich regards.” “If rates are up,” chimed in a second reader, “and your prediction is accurate… why is the Dow up 200-plus????” “No one predicted the market could possibly run this high anytime during 2009, 2010, 2011, 2012, 2013 or 2014,” piled on a third reader, “so why will it plunge now when it didn't previously? It's a new investment world, and the only thing the feds have discovered they can influence is running up the market, so don't expect them to stop now.” Why the cranky reader scribbles? Yeah, the market rallied on news of the hike. And sure, it finished 224 points higher on the day. But lookie what David said on Monday: “I can’t tell you if [a big correction] will happen Wednesday right after the announcement. Or on Thursday. Or the day after. There may at first be a dead-cat bounce or an effort by the robo-traders and hedge fund speculators to spark a relief rally. It will be short-lived. “Then the morning after will set in. As the signs of global deflation and recession become increasingly frequent and obvious, the casino gamblers will come to realize that the Fed is out of dry powder. It will be powerless in the face of the coming downturn…” The Dow ended the day down 253 points. The S&P was down 31, and the Nasdaq was off 68 points. And though the S&P is still close enough to spit at its all-time high, only a handful of stocks are pulling the wagon. As Bryce Coward points out on the Gavekal Capital blog, the average stock is currently 19% off its one-year high. That suggests “the average stock is just outside the threshold of being in a bear market.” Hear that wheezing? What’s been inflated is now being deflated. A 0.25% rate hike may not seem like much. But in order to raise interest rates -- by even that amount -- the Fed has to drain money from the financial system. It does that by lending out some of the Treasuries (what the stiffs on Wall Street call “repo-ing”) it has on its balance sheet. The Fed may have to drain up to $1 trillion of liquidity from the system just to push rates 25 basis points higher. As the curmudgeons at Zero Hedge pointed out yesterday, Citigroup says the Fed may have to drain up to $1 trillion of liquidity from the system just to push rates 25 basis points higher. “The entire QE2 injected ‘only’ $600 billion in liquidity in the span of many months,” the grumps continued, “suggesting that... the Fed may drain as much as 166% of its entire second quantitative easing operation overnight.” That’s alotta liquidity leavin’. Say that 10 times fast. (That’s alotta liquidity leavin’… That’s alotta liquidity leavin’… That’s aliquidity lotta… aw, nuts.) Author, economist and friend, Richard Duncan has schooled us well: Liquidity drives markets. “Liquidity determines the direction of asset prices,” Richard related in April. More liquidity -- credit -- is an asset upper. Less liquidity is a downer. He compares global economy to a punctured raft: “But instead of this raft being inflated with air, it’s been inflated with credit. On top of the raft, you have all of the asset classes: stocks; bonds; commodities, including gold; plus, you have the world’s population. “Problem is the raft is full of holes. The credit keeps leaking out (when people default on their debt). The natural tendency of the raft now is to sink. When it starts to sink, the stocks, property, commodities, gold all go down… “Policymakers understand rightly that if the raft sinks, it’s not going to be a matter of simply a stock market crash. People are going to die as they did in the 1930s. And so there’s only one possible policy response, and that’s to pump in more credit. That’s what they’re doing through the large budgets and through the fiat money creation, quantitative easing. “When they do that, the raft reflates and all the asset prices move up together and the people, once again, have their dry feet and are happy. “But then once they stop with the quantitative easing and the liquidity injections, the credit starts leaking out the sides again and the raft starts to sink and so they have to repeat quantitative easing. We’ve had QE1, QE2, and QE3; when QE3 stops, we’ll have QE4 and probably QE5. “The reason the raft is fundamentally defective is because at this stage, so much credit has been created globally that the income of the 7 billion on Earth, at least as it’s currently divided, is not adequate to continue paying interest on all of the debt that they have borrowed. So they keep defaulting…” Don’t look now… but… I think the watermark just moved up an inch on our starboard side. And is that… Janet Yellen? With a… manual air pump in her hands? According to fed funds futures markets, there’s a 16.6% chance the answer’s “yes”. That’s the probability they're putting on the Fed cutting interest rates (yes, cutting) at next month’s FOMC meeting. And this just one day after they hiked them. The mark of deflation if we’ve ever seen one. Hope you packed your floaties, Peter Coyne for The Daily Reckoning Poster Comment: The Federal Reserve has screwed things up so royally that it will take a miracle to fix it. Post Comment Private Reply Ignore Thread
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