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TMFPostOfTheDay (< 20)

Stocks Rally on Bad News?



December 01, 2011 – Comments (7)

Board: Macro Economics

Author: WatchingTheHerd

The 4% spike in stock markets worldwide in response to news of a coordinated central bank liquidity plan being implemented seems to demonstrate a frightening absence of short term memory on the part of markets. To understand why, step back and review exactly what happens between banks every day and the role of a central bank.

* a central bank exists to act as a lender of last result
* banks are normally expected to balance their books nightly by LOANING TO EACH OTHER to even out deposits and loans
* any time a bank reaches the point where it either cannot AFFORD the interest rate charged by its peers to help it balance its books that night or NONE OF ITS PEERS WILL LOAN IT ANY MONEY AT ANY PRICE, it has to borrow from the central bank
* by definition, when a bank has to go to the central bank's Lender of Last Resort (LOLR) window, its peer banks are saying they either have ZERO trust in the bank caught short or they have ZERO slack in their own books to lend out
* BY DEFINITION, any time a single bank has to borrow from the central bank acting in its lender of last result capacity, that is NOT A GOOD THING

Now carefully review all of those bullets above a couple of times. Who should know better the health of a giant bank than its peer giant banks? If THEY don't trust the bank to extend loans for a SINGLE NIGHT, how near death must that bank be?

Now consider

* any time a central bank has to act as LOLR for MORE THAN ONE BANK AT A TIME for large amounts of money, that by definition is a WORSE SITUATION than just a single bank coming in the middle of the night needing LOLR money

Now review that for a moment and let it sink in.

Now consider

* under normal conditions, the odds of any collection of human beings agreeing on anything involving large sums of money are very low
* under normal conditions, the odds of any collection of human beings not only agreeing on something involving large of sums money AND agreeing to ACT in lock step are even smaller -- near zero
* we just saw central banks across three continents ACT IN UNISON and commit a MASSIVE AMOUNT of lender of last resort funny money not just for a short 1-week or 1-month interval but for over ONE YEAR -- the terms extend into 2013.

Now sit back and think about that long and hard.

The news that hundreds of billions in LOLR resources have been publicly promised to banks for OVER A YEAR INTO THE FUTURE isn't a sign of springtime in a gloomy financial winter. A concerted LOLR expansion on the part of multiple central banks is a sign of incredible danger in the financial system. If the credit lockup on August 10, 2007 (see #1) was the starting pistol for the eventual meltdowns in March and September of 2008, this action is a cannon shot for what's to come.



7 Comments – Post Your Own

#1) On December 01, 2011 at 11:37 AM, kdakota630 (29.05) wrote:


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#2) On December 01, 2011 at 2:27 PM, leohaas (29.46) wrote:

I guess you were short the market...

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#3) On December 01, 2011 at 11:21 PM, Indiscr33t (< 20) wrote:

The tell was when US Bonds surged despite being downgraded.

 Hope you weren't the patsy.

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#4) On December 02, 2011 at 3:31 AM, memoandstitch (< 20) wrote:

The market has stopped deciding between good news and bad news for a while.

Now consider.

When the thing is about to explode, kicking the can down the road is bad but it could have been worse.   Why not celebrate when we get to live another year.

Think about that. 

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#5) On December 02, 2011 at 5:35 AM, Indiscr33t (< 20) wrote:

This is very bullish because the FED will never short the market.

On Weds, we found out that everybody is in cahoots and everything is SO BAD that EVERYBODY will take whatever action they can to make it less bad.

Personally, it makes me wonder wht kind of waterhose of liquidity is about to rain down upon us.

The days the fire department came to school and sprayed us during recess were always the most fun. The kids loved it because they were getting sprayed with water. The firemen loved it because they could use the jet to knock us kids over and everybody would laugh about it. The poor fire hydrant didn't get to participate in any of the fun...                      

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#6) On December 02, 2011 at 10:12 AM, rofgile (99.60) wrote:

This post is like something from the book 1984.

People across multiple continents are working together, intelligently, to fix a problem which has been unfixed over the last two years = THE WORLD IS GOING TO HELL!


That the US FED (which has SUCCESSFULLY averted a depression in the US by QE and avoiding austerity / trade wars) and other foreign central banks are now finally being let into decision making within the EU debacle is only a very good thing.  

What EU should have done from the start:

 1) Set interest rates low, pursuing QE,

 2) forgive debt of Greece

 3) avoid austerity measures or deflationary policies

What EU incorrectly did (thanks ECB, Sarkozy and Merkel!!): 

 1) Raised interest rates?!? (1st major blunder, those responsible should never work in economics again.  Probably they'll get nobel prizes or get rich as consultants instead.)

 2) Pursued austerity in multiple neighboring countries at the same time (leading to deflation, brilliant when you have problems of crushing debts!!),

 3) Didn't forgive Greek debts until it became absolutely impossible not to (inactivity until the hand is forced has shown how weak of a response the EU central banking system can have, leading to more doubt and attacks on bonds).


Every time those muppets meet over there, I just shake my head in frustration.  Every word coming out of Merkel and Sarkozy's mouth is just like diarhea.  

Sorry for the frustration, it just is hard to watch a train wreck happen over two years.  You wonder who the h**l advises these guys/gals on economics.


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#7) On December 02, 2011 at 10:50 AM, RyanCoke (99.52) wrote:

Personally I'm sitting on the sidelines waiting to fully go short.

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