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August 27, 2009 – Comments (21)

Does anybody want the world to end?  What a dumb assertion.

This post will not be up to my usual standards.  I'm pressed for time, but I have to address a running theme on CAPS.

The market is up.  That is great.  We also printed trillions and gave it to bankers, investment houses, and foreign creditors.

NO ONE, and I mean NO ONE, here at CAPS or anywhere can tell me where that money went. NO ONE.  The antipermabear crowd is patting themselves on the back for calling a bull run.  Really?  I know many permabears, as they are called, like me and others that said the market will rise as well.  Go back through my posts and comments.  What did I say?

We gave bankers trillions.  What do these guys know how to do?  What is the one thing they're good at?  Making steel?  Refining engines?  No.  They invest.

So until anyone can show me where all that new money went, I'm going to tell you that it mostly went into the market.  Why are the equities of financials leading the way?  Why did the April 2009 FDIC report show banks acquired $82 billion in equities in Q1 2009?  

I don't want the world to end, and I expected the market to go up.  I'm not positive I'm right, but I'm positive that I'm closer to the truth than the bulls.  This is an inflation fueled rally and it's running short on steam.

Deflationists keep pointing to a 1% drop in CPI and they can't figure out why the market doesn't drop.  The inflation is already here!  It's in the stock market.

David in Qatar

21 Comments – Post Your Own

#1) On August 27, 2009 at 9:42 PM, ChrisGraley (29.72) wrote:

Can I give a hundred recs?

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#2) On August 27, 2009 at 9:59 PM, nuf2bdangrus (< 20) wrote:

I think what those of us that are bearish are conserned about is the endless bubble blowing and debt creation by the Fed, in their effort to ban ECON 101, which says there are cycles of expansion and contraction.  How does someone honestly invest in a market with so many skews?  Unexploded bombs are everywhere...and everybody knows it....so how do you commit money where there are big lies underneath.....we saw what happened when the delevering hit.  Now we are relevering again.  What we want is the honest and painful choices to be made, so a foundation of real growth can be built.  Instead, I keep wondering where the next bubble will be.  Junk is king.  I can't invest that.

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#3) On August 28, 2009 at 2:14 AM, DaretothREdux (40.03) wrote:

and this is where I say something witty and insightful...but I'm too drunk (it was my room-mate's b-day!)...so I will just say...(hi-cup!)

+1

Dare

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#4) On August 28, 2009 at 4:01 AM, uclayoda87 (29.24) wrote:

Lets see how this works:

Big banks get free money from the government.

Big banks buy their own stock and the stocks of other big banks.

The price of these stocks gradually rises over a few months, encouraging the dumb money to buy these stocks and newly issued stocks at inflated prices.

Any attempt to short these stocks is met with a buying barrage by these same banks to sqeeze the shorts.  When the stock prices bounce back up, the banks take a little money off the table.  Reloading their guns for the next wave of short sellers.

Nice business model if you have infinite free money from the government.  But what happens when commercial properties and ARM residential properties implode at the same time?  The immovable object meets the irresistible force.

The banks will likely continue to go up until all the gamblers try to cash their chips at once.  How many fingers will be lost trying to catch that falling knife?

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#5) On August 28, 2009 at 8:35 AM, angusthermopylae (38.66) wrote:

NO ONE, and I mean NO ONE, here at CAPS or anywhere can tell me where that money went. NO ONE.

dwot has asked the same question several times, and it makes me think that that is why there has been confusing signals from the economic reports:  The money is "really" there.

CPI is down 1%...which is a small deflationary indication (if I understand correctly.)  Billions/trillions have been put into the banks, treasuries, etc ("printing out of thin air")...which is inflationary.

Perhaps it's because the money/cash isn't out in general circulation--it's on the books, being passed back and forth to prop up major companies and institutions...but very little of it will become folding money.

...which makes Bernanke's "unwinding" task even harder:  Over time, it gets more and more difficult to separate out "real" growth (if any) in the fundamentals of these companies from fluff.  I would argue that the Treasury/Fed are worried about yanking out the wrong thing and having it all come tumbling down.

For example:

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#6) On August 28, 2009 at 8:36 AM, angusthermopylae (38.66) wrote:

The money is "really" there.

...sorry, that should be:  The money isn't "really" there.

...first cup of coffee and all that...

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#7) On August 28, 2009 at 9:15 AM, XMFSinchiruna (27.51) wrote:

whereaminow,

+50 recs from me. :) 

The financials could lead the way downward when this all breaks. Regional banks are about to get slammed by a second wave of mortgage defaults and a nasty deterioration in commercial real estate loans. Again, these are all tragic developments with sad implications for Americans, so there is zero pleasure derived from perceiving such a scenario. If I'm invested defensively against such a retracement, it's to protect my family, not to partake in Schadenfreude.

Funny, I still have Meredith Whitney's words from May whispering in my ear, but I guess we can add her to the "delusional permabear" list:

http://www.examiner.com/x-1760-Baltimore-Investing-Examiner~y2009m5d18-Why-It-Pays-to-Listen-to-Meredith-Whitney

"They were overdone all the way into this rally. What happened was the government - I call this the great government momentum trade - the government enabled the banks to have better than expected, better than even the banks could organically deliver, first-quarter earnings. That looks like it could continue into the second-quarter and the third-quarter. The banks rallied from well below tangible book multiples to almost two times tangible book multiples [...] the underlying core earnings power of these banks is negligible," she says."

Here are my comments from back in May, which still apply:

Is there not something to be said for listening to the guys that have been right all along?

GMX and I have disagreed more times than I can count, but when it comes to understanding that this rally is a complete fantasy, he is 100% correct.

Meredith Whitney has called it this the "government momentum rally", noting that the "core earnings power of the banks remains negligible".

Peter Schiff: "the premature conclusion ... that the crash of 2008/2009 is now a fading memory, is just as delusional as [the] failure to see it coming in the first place."

Jim Sinclair predicted that a rally of this nature would coincide with the reinstatement of the uptick rule... and it did.

This entire rally was nothing more than a means to pump up share prices long enough for banks and corporations to raise capital from the already beleaguered shareholders. There was never a fundamental basis for it. We'll call it a stage in the capitulation process, but nothing more. TARP is a sham.

With the mountain of evidence pointing to deteriorating fundamentals of the domestic economy, I remain bearish on the indeces until such time as inflation kicks in in earnest. From there forward, all bets are off as to predicting market flows, though I can still predict the long-term trajectory of the U.S. dollar... and it's not pretty.

All of this is very sad, and I take no pleasure in holding these views... but these are the conclusions I've drawn from the massive volume of evidence I've reviewed.

I will not label myself a bear, since I look forward to turning bullish sometime hopefully this decade. :) 

 

I stood at the station watching this rally train head down the tracks, detecting a distinct smell of burning breaks on the engine car, and hoped in vain that passengers would remember to disembark before the treacherous down-grade. For those who follow the fundamentals ... the foundation upon which economies are constructed ... it's clear there's a bridge out around some blind corner.

 

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#8) On August 28, 2009 at 9:17 AM, GNUBEE (24.95) wrote:

"I'm going to tell you that it mostly went into the market. "

Confidence builder, step 1. Get boomers retirement savings statements back up. They don't feel poor, and suddenly get happier- economy (consumer) starts moving again. How much of the consumer malaise can be attributed to watching "savings" evaporate? I can't quantify, but think its integral.

Way too overly simplistic, but your quote agrees with a thought that I have had as well. But I believe the "re-inflation" is just another trick to make the masses think we are OK. The game continues, we just raise the baseline (inflation)

Glad to hear from you again. 

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#9) On August 28, 2009 at 10:11 AM, farmnut1985 (33.22) wrote:

Great post.  I fully agree that the money has inflated the stock market.  Question is: what happens when the banks pay back their TARP money?  That is if they can.  Will that re-deflate the market?  I honestly think it may not matter as many will not repay until we are out of this mess anyhow.  Also what will the goverment do with the money once repaid?  How likely is it that they will pay back on the national debt or will they see it as a big paycheck and go on another shopping spree and start a healthcar plan for pets or something wasteful?

 RPM 

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#10) On August 28, 2009 at 10:22 AM, outoffocus (23.11) wrote:

For those who follow the fundamentals ... the foundation upon which economies are constructed ... it's clear there's a bridge out around some blind corner.

Very well said.  I guess we'll be called fundamentalists.

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#11) On August 28, 2009 at 10:34 AM, jstegma (29.26) wrote:

Fear of inflation or actual inflation?  I'd say the rally is driven more by fear of inflation.  You can have fear of inflation, but if prices and wages don't go up eventually, you don't really have actual inflation.

In times of inflation, existing debt becomes less burdensome.  That's not happening so far, and it doesn't look like it's about to happen either.  

You are right that the rally is fluff.  The recovery hopes and the inflation fears will both turn out to be overblown, and the stock market will begin looking for a reasonable bottom again, presumably higher than the March lows, but definitely lower than the current levels.

 

 

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#12) On August 28, 2009 at 10:40 AM, jason2713 (< 20) wrote:

Agree, agree, and oh wait.....agree more!

Market is being propped up.  Sooner or later, when investors sell, the only ones left in the market are the banks...then what? They lose their shirts again, and drag down the suckers with them.

Oh well, let the market go where it will, but I'm out of it.  Momentum is driving the market, banks are adding the fuel.  The higher it goes the harder it'll fall.

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#13) On August 28, 2009 at 1:21 PM, jester112358 (28.83) wrote:

Yes, this rally is based upon junk stocks like FRE, FNM, C, and AIG which sometimes account for 25-50% of daily volumn.  And guess why they seem to only go up?  The cost to borrow shares (except C) to short is exhoribinant, sometimes as much a 40%/year interest (for AIG).  So, there are effectively no shares available to short (source:  zerohedge), there's an uptick rule and rampant manipulation by the program traders like GS and JPM.  The markets are rigged.

 You're right, the new credit went somewhere:  into another case of malinvestment, to reinflate the bubble so beloved of the political and bankster class.

 Excellent post.

 On the positive side the NY judge has just ruled that the FED must reveal the names and collateral of the banks and others who "borrowed" using the FED discount window.  In short, reveal its balance sheet for the first time since its inception.  Things are about to get very interesting (another financial meltdown? Don't you just wonder the kind of junk (certainly not AAA) collerateral the FED has been accepting to back its trillions of loans to the banksters?  I can hardly wait.  Get your pickforks and torches ready boys and girls.

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#14) On August 28, 2009 at 7:09 PM, TMFLomax (46.05) wrote:

Awesome post and comments... I think I hit on similar themes earlier today without even having run across this yet! Yeah it is all wild and the shoes are still dropping.

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#15) On August 31, 2009 at 5:08 PM, goldminingXpert (29.46) wrote:

"Fear of inflation or actual inflation?  I'd say the rally is driven more by fear of inflation.  You can have fear of inflation, but if prices and wages don't go up eventually, you don't really have actual inflation."

This is correct. I disagree with the original poster because the stock market wealth isn't real... the increased valuations are only on paper, driven up by paper-thin volume. Should people try to cash out their "gains" they'll find there is little to no bid at these elevated levels.

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#16) On August 31, 2009 at 9:53 PM, whereaminow (20.25) wrote:

goldminingXpert,

I think you're missing my point.  Printing money (a euphemism) isn't real wealth either.  But price inflation is always a result of monetary debasement.  As Jim Rogers said, the Dow can go to 1 million if the Fed creates enough currency.

Wealth is productivity.  There is nothing productive about what the Fed has done.  But the newly created money is real.  It's not just on paper, it is paper (well, or 1s and 0s let's say - it doesn't matter, you know what I mean.)    

No one knows exactly what happens when the Fed gives out a trillion new dollars.  No one at the Fed even knows.  A human, a computer, nothing can follow a trillion dollars to see how and where it goes.  It's insane and shouldn't be done. EVER.  

But we can make some logical deductions.  The money isn't injected at random.  The money does not affect everyone the same way.  The money does not get divided up and passed out to the entire global population to use all at once.  

The money is injected at points.  Those who get it will use it.  (Otherwise, why would they need it?)  If you give the money to a baker he is likely to buy bread.  If you give it to an auto dealer, he is likely to buy cars.  

If you give it to an investment banker, he is likely to buy....

David in Illinois

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#17) On September 08, 2009 at 11:02 PM, checklist34 (99.70) wrote:

to be honest, I think that one of the hallmarks of the permabear camp is an overriding desire to "be right". 

And, frankly, I think a few permabears would revel in the glory of their correctness as the world burned around them, so, ... yes, frankly, I think some permabears cheer for the world to end.  Markets to crash, misery to reign.  That means they were right.

The permabull camp is perhaps no better, but at least they hope the world is better someday than today.  The level to which dogma overrides all else in the permabear camp is fascinating.  The desire to be right overriding all...

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#18) On September 09, 2009 at 11:15 AM, goldminingXpert (29.46) wrote:

Checklist, you'd make a terrible psychologist. Quick, which Freudian stage of sexual development went wrong in permabears that cause them to be so negative? ;)

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#19) On September 09, 2009 at 11:47 AM, jason2713 (< 20) wrote:

Maybe the pessimists need to get laid more.

That's not necessarily a bad thing.

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#20) On September 09, 2009 at 11:58 AM, catoismymotor (28.03) wrote:

"He baby, my glass is half empty." ;)

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#21) On September 09, 2009 at 6:04 PM, whereaminow (20.25) wrote:

checklist34,

If you and I were to enter into a debate, in which I made the claim that two plus two equals four, and you claimed that it equals five, would you also fall back on armchair psychology when your point proved invalid?

jason2713,

My fiancee is smoking hot.

Add me on Facebook.

David in Qatar 

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