Wednesday, October 29, 2014

Total Global Debt Crosses $100 Trillion: QE Programs Will Not Stop The Collapse

The following chart shows where we have come from the start of the quantitative easing experiment in the United States in 2008. The Fed's balance sheet has risen from $800 billion to over $4.4 trillion, as they announced today they would temporarily end QE for the third time.

The Fed holds bonds on its balance sheet and when those bonds reach their maturity they will continue to reinvest or roll that money back into new bonds. The same goes for the income (interest payments) the Fed receives on these bonds. In essence, the Fed will continue to conduct "stealth" QE moving forward (about $16 billion per month to keep its balance sheet at the current size). This portion of the QE discussion goes unnoticed by most of the media and financial analysts.

Beyond the stealth QE program that will continue (until they announce a larger real QE4 program in the future) the Fed will hold interest rates at crisis levels for an "extended period." In their words today:

"The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the long run."

What has the all powerful Federal Reserve so afraid?

The simple truth is that the Federal Reserve is powerless against market forces should they turn against them. Think of someone running alongside a tornado holding a small fan thinking they have the ability to control the direction that tornado will move next.

Public (government) and private (individual and corporate) debt globally reached the "impossible to ever pay back" level of $35 trillion in mid 2001. By mid 2007 total global debt doubled to an astounding $70 trillion. This week we received the updated numbers showing that six years later in mid 2013 global debt had crossed $100 trillion (it is certainly much higher today over a year later).

As I mentioned, this debt total includes government bonds, corporate bonds, mortgages, credit card debts, consumer debt, etc. from around the world. It does not include bank debt, which would put it closer to the $280 trillion level. Remember that bank debt can be considered part of government debt because when bank debts go bad the governments (taxpayers) "must" immediately step in to cover any losses; a key lesson we learned from the Lehman Brothers bankruptcy.

The $280 trillion total does not include unfunded liabilities (which in the U.S. alone are over $100 trillion) or derivatives; "off balance sheet" bets banks place with each other. The derivative total is estimated to be fast approaching a quadrillion dollars.

Can you see why the Fed's $3.6 trillion in new money created over the past 6 years is just a drop in the ocean compared to the debt outstanding? What the Fed and the supporting central banks around the world have done is provide a small token of good faith to show they stand ready to protect the financial markets should the $280 trillion in debt begin to wobble.

In essence, they bluffed, and the bond vigilantes folded. Investors have purchased and agreed to roll forward the $280 trillion in debt outstanding on blind faith that the paper contracts they hold will be paid in full the day they decide to cash them in. Global interest rates on the $100 trillion in public and private debt have fallen from 4.8 percent in 2008 to just 2 percent today. 

This is why the Fed, the European Central Bank, the Bank of England, the Bank of Japan, the People's Bank of China and every other central bank around the world must stand together in unison, without blinking, to tell the debt markets they stand ready to do "whatever it takes." The balance sheets from the major central banks around the world have grown by almost $10 trillion since 2008 (central banks print money to purchase assets) as they have held rates close to zero.

The central bank leaders today are considered godlike by their ability to move and control markets. In reality, they control nothing. Someday we will wake up and someone holding an IOU in the $280 trillion debt market will decide not to roll it forward and they will ask for their money back. The person standing next to them may see them do this and decide they should ask for their money back too. Interest rates, which have been falling around the world for 32 years, will rise off their ridiculous 2 percent levels and move higher. The tornado will have turned and the $10 trillion in QE will be seen as a small handheld fan in comparison to the power of a 280 trillion dollar debt market.

Then you will see the real crisis unfold and the world will turn to their saviors; the central banks. The fear will not come when paper assets begin to experience declines, it will come when investors collectively realize central banks have no power to stop a worldwide debt avalanche. 

When this moment arrives there will be chaos and there will be opportunity. For those that seek to go further down the rabbit hole and peer into the future, I highly suggest you read The Death Of Money, which walks through how the new monetary system will be created after the current one collapses.

For more see:

Global Debt Grows Exponentially While The Income To Support It Does Not

Tuesday, October 28, 2014

Four Straight Months Of U.S. Home Price Declines

The Case-Shiller home price index data was released this morning showing a month over month seasonally adjusted decline in home prices for the fourth month in a row.

Robert Shiller discusses the data with CNBC below noting that while the American dream is still to own a car and a home, there is a lot of common sense in support of renting and taking public transportation. 

It must be difficult for readers of this site outside the United States to try and figure out why a government would provide unlimited subprime auto loans, unlimited subprime student loans and unlimited subprime housing loans (Fannie Mae and Freddie Mac are already working on a new 3% down program for "less qualified" borrowers).

The answer is simple. The more debt the government has issued (so far) the lower interest rates have gone and the more demand there has been for U.S. government debt. Supply/demand and quality no longer matter, just like it did not matter for U.S. subprime mortgages from 1997 to 2007.

Then one day psychology changes and the world collectively realizes they are holding a mountain of toxic waste on their balance sheet that will never be repaid. Until that moment arrives, keep the party going. Get ready for zero down subprime auto, student and housing loans in the years to come.

Monday, October 27, 2014

Global Debt Grows Exponentially While The Income To Support It Does Not

Excellent visual below posted this past weekend at Mauldin Economics showing the growth in global debt to GDP over the last 12 years. While we often focus on the worst offenders here on this site (Japan, U.S., Europe, UK, China) which are the most likely to have a debt crisis/implosion first, it is important to remember that the debt binge that has taken place since the start of this century has been a truly global phenomenon.

Global debt to GDP has grown from less than 165% to over 210% in just 12 years:

If you borrow money today you must sacrifice in the future when the debt must be repaid. Borrowing money turbocharges present growth at the expense of future growth. We are 75 years into the current debt super cycle so many believe it is impossible for a developed economy to face a real debt crisis (2008 was concentrated in just a small sector of the global debt market; U.S. subprime housing).

My guess is there will be a severe crisis from one of these major economies in the next five years:

1. Japan (government debt)
2. China (corporate/real estate debt)
3. Europe (government/financial debt)
4. U.S. (government debt)
5. U.K. (financial debt)

I think the likelihood of them occurring are listed in the order above, but on paper every single one of those debt categories should implode tomorrow morning. The only thing that has stopped that from occurring has been the ability to continuously roll the debt into new loans at lower interest rates. This has been supported by the central banks around the world and investor willingness to continue to buy today and hope there will be a greater fool tomorrow waiting to offload the debt.

For more see:

What If The Stock Market Fell & It Did Not Recover?

Friday, October 24, 2014

After Three Uninterrupted Years U.S. Stocks Experience Chart Damage

Many participants in the financial markets make their investing/trading decisions exclusively off what is happening with the price of a stock. This strategy is called technical analysis because you are simply using the data created on a chart, and you do not take into account the fundamentals surrounding the company (earnings, growth, economy, etc.).

For me personally, technical analysis is probably the least important part of any investment decision I make. It enters the picture as one of many determinants used, and it carries little weight on the ultimate decision. However, it must be part of an investment decision because so many people following the financial markets buy or sell because of what is taking place on the charts. 

How undervalued or overvalued an asset is means nothing for the direction an asset will move in the next 15 minutes, 15 days or 15 months.  As asset will only rise or fall in price when the market collectively decides it wants to buy or sell that asset. Never before. We know that throughout history those that have bought and held undervalued assets while they waited for the market to locate that value have become the most wealthy people in the world. We also know that those that have bought overvalued assets in the hopes that the market would take them higher almost always look and feel great in the short term and end up broke in the end. 

Does that make anyone feel better in the short term by investing in fundamentally sound countries, currencies or business that continue to fall in price while they watch high flying U.S. stocks with no earnings rise relentlessly every hour? Of course not. Investing is about 10% intelligence and 90% mental strength. 

Since we know the market carries significant weight on technical analysis we can use it to provide clues to when the moment will occur when market participants begin to "discover" the over or undervaluation within the financial markets (even if we/I do not believe in technical analysis). Writing this now I feel like I could digress into 20 paragraphs on how this applies to game theory within the financial markets, but I will try to stay on track. 

The S&P 500, starting in October 2011, began its most breathtaking and uninterrupted run perhaps in history. The chart below shows the trend line that began that fall, which was essentially unbroken for three full years. If you were to zoom out on this chart and look at the market over 20 to 30 years, this line looks like a parabolic moonshot directly upward into space. You can see below that last week this incredible trend line was finally broken (charts below from STAWealth).

Here is the zoomed in view of the most recent action. The chart labels the trend line beginning on November 2012 but we can see above it was actually a year earlier. 

The recent decline took stocks below their 50 day moving average, then the 3 year trend line, then their 200 day moving average. The 200 day moving average was almost immediately recaptured. 

What does this mean for stocks? For technical traders this is what you would call "damage to the charts." We know U.S. stocks are wildly overvalued and surrounded by extreme euphoria. On the way up, traders have loved the chart and they have bought relentlessly (with the rest of the world). On the way down, as the chart begins to experience "damage," you will see technical traders quickly exit along with over leveraged hedge funds and the new entrants to the party; high frequency traders. 

This is why I believe the market is more likely to experience a severe waterfall decline on the way down, instead of a comfortable escalator ride. The old saying goes (and it was confirmed by the first drop last week), the bull slowly climbs the stairs and the bear jumps out the window. 

Thursday, October 23, 2014

Barron's Big Money Poll: Breathtaking Confidence In U.S. Stocks

Barron's conducts their "Big Money Poll" twice a year with 145 portfolio managers representing some of the largest investment companies in America. The most recent results have come in (click for larger image):

70% believe stocks will be the best performing asset over the next 12 months
72% believe the U.S. stock market will provide the best returns 
84% are bullish on large cap U.S. stocks

Are you ready for the most dire prediction of the 145 managers polled?

The DOW will end the year about where it is today at 16,500 and by mid 2015 fall by........23 percent. Really? That is the most dire prediction that one "crazy" manager could come up with?

In other words, those managing the money of U.S. stocks have clients all-in with 100% confidence in U.S. stocks in 2015 and beyond. What could possibly go wrong?

For a review of what the "Big Money" was saying during the last market top see:

Flashback To December, 2007: What Was The Outlook For U.S. Stock Prices?

Emerging Markets Provide A Stronger Expected Return Than The United States

A topic discussed relentlessly here over the past year has been how overvalued the U.S. stock and bond markets are relative to the rest of the world (specifically emerging markets).

The chart below from Research Affiliates shows the expected returns for specific asset classes in the years ahead. While emerging market stocks are shown to have the highest positive expected return, they also come with greater expected volatility (meaning prices could drop sharply in the short term).

You can see the dismal expected returns for U.S. stocks and bonds in the years ahead (far right). To play with their interactive graphs and review how their expected returns were generated click here.

The following chart helps illustrate why emerging market stocks represent a better current value. While U.S. stocks have risen parabolically for 3 years running, emerging market stocks have stagnated and essentially tracked downward during that period.

Am I buying emerging market stocks today? Not yet. My hope is that when the bubblicious U.S. stocks begin to sell off, they drag the price down further on some of the more quality and less expensive markets around the world (creating a better entry point for purchases). For more see:

A Visual Walk Through Of U.S. Stocks Relative To Markets Around The World

h/t Short Side Of Long

The Best Time To Buy Plane Tickets

It's fascinating how much the price of an international flight fluctuates day to day when purchased in the United States. The Wall Street Journal reports the best day of the week to purchase tickets is now Sunday, with Saturday coming in second.

Wednesday, October 22, 2014

Kyle Bass On Japan & The Changes In Global QE

On Japan:

How global QE policy changes will impact currency markets and U.S. stocks:

Saturday, October 18, 2014

The Federal Reserve Swiftly Enters To Stop The U.S. Stock Market Decline

On Tuesday morning, the Federal Reserve woke up and saw the stock market was going in a strange direction it was not supposed to be going; down.

Action was taken immediately, beginning with San Francisco Fed President John Williams who said, "if we get a sustained, disinflationary forecast.....then I think moving back to additional asset purchases in a situation like that should be something we seriously consider."

The stock market regained its footing on Tuesday and by Thursday afternoon it was time for another Fed member to turbocharge the rally. St. Louis Fed President James Bullard stepped up and said, "we have to make sure that inflation expectations remain near our target. And for that reason, I think a reasonable response by the Fed in this situation would be to.....pause on the taper at this juncture, and wait until we see how the data shakes out in December."


Only two weeks ago there was an across the board consensus coming from the Federal Reserve that not only should QE be stopped, but the Fed should immediately begin raising rates in 2015. The Fed's dual mandate is to promote low unemployment combined with stable inflation (discussing the absurdity of this dual mandate is beyond the scope of this discussion). The number of people applying for unemployment in the U.S. this week fell to a 14 year low. Combine that with a falling cost of living due to the energy decline and the Fed's dual mandate looks right on track.

However, there was one sector of the U.S. economy that experienced severe deflation this week: the U.S. stock market. The Fed's immediate reaction to talk up the market with unemployment improving and inflation falling reveals the Fed's true mandate: promoting a higher S&P 500 close at the end of every trading week. 

The most interesting part of this sham is when the real sell-off arrives market participants will see that the Fed is actually powerless to stop it.

There is one last option, the "nuclear" option, that can be employed during a stock market collapse; large scale purchases of U.S. stocks through QE (printing money to buy stocks).

This is the weapon of last resort, and I expect it to be used in the latter stages of the coming crisis in the massively overpriced U.S. markets. Japan is already employing this strategy with their central bank currently in the market every month making stock purchases (alongside their enormous bond buying program).

So how will this all play out and under what timeline?

I have absolutely no idea. If anyone tells you they do, politely excuse yourself from the conversation and walk away.

We are so far away from charted territory and so far away from anything that remotely resembles a real market it is beyond impossible to try and figure out how the market will react in the short term to every central bank intervention.

In the long term, what we do know with assurance is that every central bank intervention fundamentally weakens the general economy and financials markets. It is a poisonous intravenous fluid continuously injected into the arm of the financial system.

It is fairly simple to understand that a debt problem cannot be solved with more debt and printed money; it will only create a larger and delayed crisis in the future. Yet, after years and years of a market rally combined with central bank board members holding fancy economics degrees telling the world they have everything 100% under control, people believe the wizard is real and there is no reality waiting behind the curtain. In the end there will be chaos.

For more on the coming change to voting Fed members (who will be promoting additional QE) see:

Jim Rickards On The Structural Depression, U.S. Dollar & Gold

Friday, October 17, 2014

Jim Rogers: Most Assets Should Be Avoided Today

He is currently interested in agriculture (mentions rice and sugar specifically), and stocks in Russia, China and Japan.