March to economic madness


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Back in June 2013, when Federal Reserve Chairman Ben Bernanke proposed to taper — and possibly end — the Fed’s unprecedented $85 billion a month purchases of mortgage-backed securities and Treasuries, stock markets tumbled and bond yields rose. The Dow Jones Industrials and the Standard & Poor’s 500 each fell 1.4 percent. The Nasdaq composite index fell 1.1 percent and the 10-year Treasury bond rose to 2.33 percent from 2.18 percent. With few exceptions, markets overseas also fell on the tapering news. In response to the sell-off, the Fed quickly calmed the market with assurances that the money flows would continue until positive signs of economic vitality had been restored. The media was flooded with financial industry shills and government lackeys telling everyone to take a deep breath and to have trust in the Fed.

Following Bernanke’s announcement, we forecast the Fed would indeed taper, but would wait until after the Christmas holiday shopping season, fearing that paring back in December could spook the markets and have a negative ripple effect on retail sales. On December 18th the Fed announced it would cut purchases by $10 billion a month in January. Within seconds, the Dow Jones Industrial Average, after initially falling sharply on the news, shot up 292.71 points. 

According to Pam Martin, who worked on Wall Street for 21 years and is editor of Wall Street On Parade: A Citizens Guide to Wall Street, it was panic short-covering rather than a rally that drove stocks up. Who pushed the market up in the first place to panic the shorts? “Because of off-shore trading and dark pools, we’ll never know who turned the onset of Fed tightening into a rally and a cheery ‘vote of confidence in the economy,’ ” she concluded.

According to Dr. Paul Craig Roberts, “The markets also snapped back because the Fed made clear that the reduced purchases were not an indication of less accommodation and Bernanke had guaranteed continued low interest rates well past the time that the unemployment rate declined below 6.5 percent.” 

Who pushed the market up to panic the shorts? The most likely suspect is the New York Fed, which, in fact, has its own trading desk where it can participate in markets, using essentially unlimited funds.

Thus, despite the mid-year threat of tapering and end year follow-through, global stocks closed out the year with the MSCI World Index spiking nearly 25 percent, giving it the best gain since 2009, while the Stoxx Europe 600 closed up 17 percent. In the U.S., the Dow Jones Industrial Average spiked 26.5 percent on the year — its best performance since 1995 — and the Standard and Poor’s 500 Index registered its biggest gain since 1997, rising 30 percent.

ut the Wall Street world of stocks is a world away from Main Street.  As the New Year rang in, the Fed’s total holdings topped $4 trillion, compared with around $839 billion before the Panic of ’08. And while equity players have handsomely benefited, the trillions pumped into the markets have not trickled down to the man on the street:  

Andrew Huszar: Confessions of a Quantitative Easer
I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.
(The Wall Street Journal, 11 November 2013)

 

Billionaires Worth $3.7 Trillion Surge as Gates Wins 2013
The richest people on the planet got even richer in 2013, adding $524 billion to their collective net worth, according to the Bloomberg Billionaires Index, a daily ranking of the world’s 300 wealthiest individuals.
The aggregate net worth of the world’s top billionaires stood at $3.7 trillion at the market close on Dec. 31, according to the ranking. The biggest gains came in the technology industry, which soared 28 percent during the year. Of the 300 people who appeared on the final ranking of 2013, only 70 registered a net loss for the 12-month period.
“The rich will keep getting richer in 2014,” John Catsimatidis, the billionaire founder of real estate and energy conglomerate Red Apple Group Inc., said in a telephone interview from his New York office. “Interest rates will remain low, equity markets will keep rising, and the economy will grow at less than 2 percent.”
…”Billionaires are asking what they should do with their money in 2014,” Mark Haefele, Global Head of Investment for UBS AG’s wealth-management unit, said by phone from New York. “Central banks will continue to be supportive, so equities will likely continue to rise during the year.”
 (Bloomberg Personal Finance, 2 January 2014)

The numbers don’t lie. The average family income of the top 0.01 percent, increased by 76.2 percent from 2002 to 2012 while, over the same period, the average family income of the bottom 90 percent decreased by 10.7 percent.

It was a worldwide phenomenon. Yes indeed, “Central banks will continue to be supportive, so equities will likely continue to rise during the year.” It’s plain and simple: The richest are getting even filthier rich as the rest of society’s income shrinks and debt levels grow.  And, with record-low interest rates and trillions in cheap money fueling the investment sectors and equity markets, the average ‘saver’ who used to get 4 to 5 percent interest from their bank or money market accounts is lucky to get a quarter of one percent on his savings today.

Who would have believed that America, the place on the planet once admired as “the land of opportunity,” would become “the land of inequality?” Simultaneous with publication of the Autumn 2013 Trends Journal — whose cover story was titled “Empire America fading fast” — a Pew Research Center poll was released showing that the perception of America as a world leader has tumbled to a 40-year low.

Imagine yourself back in the year 2000, reading a story titled “Holiday Spending Highlights U.S. Wealth Gap.” Anyone saying that back then would have been called a socialist, Marxist, anti-capitalist-communist. Not anymore. A story with that very title was headlined on CNBC — the Wall Street Standard of business news — on December 3, 2103. The facts are there for everyone to read and understand.

Since the Panic of ‘08, the top 1 percent, whose incomes increased 31.4 percent, seized 95 percent of all income gains. During the same period, the income of the bottom 99 percent grew only .04 percent. Between 2007 and 2012, median household income in the U.S. slumped 8.3 percent. Since the Panic of ’08 the number of people on food stamps spiked from 28.2 million to 47.7 million, a 70 percent increase in just five years.

The top 1 percent own over 50 percent of the nation’s wealth, the highest level of inequality in a hundred years. Just 400 Americans are worth $2 trillion, which, to put it into perspective, is more than the GDP of countries such as Italy, Mexico or Canada.

Wealth Gap? Try Grand Canyon 

To varying degrees, it’s the same everywhere. Even the Bank of England has admitted that its cheap money policy had mostly enriched the top 5 percent of households.

As the data proves, over the past four years, the world’s billionaires have seen their combined net worth double while governments impose draconian austerity measures that robbed the public to pay for the massive frauds committed b
y bankster bandits and financial mobsters.

So what’s going on? Some people say to me, “This could not have happened if it was not for the dumbing-down of society.” Possibly, but since the dawn of recorded history “civilizations” have a proven track record of having what it takes to destroy themselves. You only have to go back to World War II Germany. Scientifically, philosophically, culturally, in the 1930s Germans were at the top of Western civilization, only to let a two-bit freak, Adolf Hitler, destroy their nation. From the Egyptians to the Romans to all those known and unknown civilizations long before and long after, once-great nations have been destroyed by their own governments, leaders and assorted madmen and madwomen, while the majority of its citizens either joined in the madness or remained silent and only a few protested.

Dwight D. Eisenhower got it partially right when he said, “Our American heritage is threatened as much by our own indifference as it is by the most unscrupulous office or by the most powerful foreign threat. The future of this republic is in the hands of the America voter.” But in America, France, Italy, Egypt, Syria, Canada, Mexico, Argentina … name the country… who does the voter get to vote for? More often than not, rather than having a choice between the greater of two goods, they’re constrained to choosing a “lesser of two evils.”

What you need to know

Investing in stocks based on earnings and valuation is a relic of the past. Today, there is no such thing as a real “market.” That’s a figment of economic textbook imagination. Computers running algorithms, not humans, are trading on nano-cents in nano-seconds.

Everything is manipulated by banking bandits and the higher authorities. Proof? Interest rates! No question about it. The Fed proudly admits to rigging them. Market fundamentals? There are none! Following the Panic of ’08, the Federal Reserve and central banks around the world were secretly pumping trillions of dollars into the failing financial system. These were, at the time, unimaginable schemes to be undertaken by nations that prided themselves on capitalism.

And while we are not naïve about the dirty dealings of the financial industry, the rigging of the daily multi-trillion dollar LIBOR and FOREX markets has turned out to be no conspiracy theory, it is fact. And, if there’s trouble in the foreign exchange markets, no need to worry. Uncle Sam rides to the rescue with about $105 billion in the Exchange Stabilization Fund (ESF) and another $58.1 billion in Special Drawing Rights (SDR) from the IMF (The International Mafia Federation). And if markets really get out of hand, there’s always the Plunge Protection Team (Working Group on Financial Markets) — comprising the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission — to bring order to unruly markets.

The game is rigged. Capisce? The levels of money and market manipulation are unprecedented in history. Thus, the best we can do is make forecasts based on generally accepted market fundamentals. Considering the socioeconomic and geopolitical policies being advanced, we forecast a troubled and turbulent 2014 economy.

We had forecast that the Federal Reserve would announce another round of tapering in late January and that, as a result, emerging market equities would be battered. Both forecasts were correct. It was the five-year flood of stimulus that drove demand for emerging market assets and it will be the lack of cheap money that will badly batter those economies and drive down their currencies. Yet, even as emerging market economies are in decline, their governments and central banks, in attempts to stop money outflows and currency devaluations, have dramatically raised interest rates. Thus, the higher the interest rates the more it cost to borrow money which, in turn, will put even greater downward pressure on those already weakened economies.

It was also cheap-money policies that fueled China’s economy following the Panic of ’08 and it will be tight-money policies that will lower its economic growth in 2014. During the holiday season, when most people were not tuned into the news, the trend indicators were being reported:

Concerns mount over China cash squeeze
Painful reforms loom amid rising risks
China’s cash squeeze has worsened despite the central bank’s repeated attempts to calm markets with emergency money injections, throwing a harsh spotlight on rising risks in the second-biggest economy
(Financial Times, Christmas Eve, 2013)

Fears after Key China debt level soars 70%
Local government borrowing nears $3 trillion
Local government debt levels in China have soared into almost $3 trillion in less than three years … highlighting one of Beijing’s most daunting challenges as it attempts to sustain economic growth while avoiding a financial crisis.
(Financial Times, New Years Eve, 2013)

Like the U.S., UK, Eurozone, and so many other countries, China — whose debt-to-GDP ratio rose from 128 percent to 216 percent over the past five years — had become reliant on cheap capital. Local governments, whose debt load increased some 13 percent since 2012, had spent heavily on infrastructure and dead-end projects to fuel growth even as the nation’s import/export markets contracted and GDP weakened. With nearly half of that debt coming due at the end of this year and China’s government trying to wean speculators off cheap money by raising rates, loans from shadow bankers, who charge loan shark rates, comprise an estimated 11 percent of new lending. It is estimated that the shadow-banking sector now accounts for 20 to 30 percent of China’s GDP. And overall, 43 percent of local government’s $3 trillion in debt came from “non-bank” sources, according to China’s National Audit Office.

Meanwhile, back in the States, the New Year started off on a down note. It was the longest stretch of declines to start a year for the Standard & Poor’s 500 Index since 2005. U.S. stocks would have their worst January since 2009. The usual market-driving suspects, such as employment numbers, retail sales, manufacturing, housing, etc., were identified as causes in the business press, but the lurking prospect of rising interest rates was not among the factors mentioned. In fact, Fed Chairman Bernanke — who had promised that the Fed would remain committed to keeping interest rates low even as it began curtailing its monthly bond purchases — dismissed the possibility. “The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after” the jobless rate breaches the Fed’s 6.5 percent threshold, he said. The Fed has been holding its benchmark interest between zero and 0.25 percent since December 2008. Yet, when Bernanke announced his blueprint for tapering in June 2013, the 10-year Treasury yield spiked from 1.6 percent to over 3 percent.

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