28 May 2013

Rising Margin, Negative Guidance, Madness of Crowds

Early this morning one of my compadre's asked me, 'Is there some reason for this rally?'

And I answered, somewhat glibly, 'Yes, it's rally Tuesday.'

Stocks will have rallied 20 Tuesdays in a row in the US if they rally again today.

And that is as good an answer as any, although the already rallying market 'got some jets' when the Consumer Confidence number came out better than expected at 10 AM.

The Conference Board confidence number is highly correlated, as a lagging variable, to the stock market price. In other words, consumer confidence follows the market, and not the other way around.  It is less a reason for a stock rally than an excuse.   Rising stocks tend to give some people a good feeling about the economic outlook.  And don't think for a minute that the financial planners do not know this.

The underpinnings of this marvelous rally are not substantial to say the least, despite the usual assurances of economists that this is not a stock bubble. Or that there is no bond bubble which is a real howler given the Fed's steady non-market-priced buying of billions of bonds each month.   I suppose that is why the Primary Dealers had to take down 65% of today's two year auction.  Let's not notice the man behind the curtain so we can feel 'confident.'

Bubble or not, new era or not, QE or not, at some point price reverts to the mean, to the fundamental and sustainable market equilibrium, every time.  And it will do so despite the hubris of the modern monetary theorists, from Bernanke to Krugman to Mosler.   Reality is not whatever we say it is, even if one is able to persuade a large number of people to believe it, for a time.

If this falsehood is held in place long enough, even by force, the reversion will occur in extremis through a collapse of the currency.  This is what we saw in the fall of the old Soviet Union.

Here is an interview with Jim Grant that I found to be interesting.   I do find his belief in the efficiency of markets to be curious, if not obtuse, when he says that there can be no manipulation in gold because otherwise everyone would know it.

People have a remarkable ability not to see things when their paycheck depends on their not seeing it.  And a belief in the system remains stubborn amongst those who have basically honest hearts.  They cannot believe in a perfidy so great amongst people sworn to uphold the public interest. 

How else would you explain the fact that so few saw the housing bubble, the widespread fraud in the credit markets, and the mispriced risks and co-dependencies of the insolvent in the financial system that so recently caused world markets to collapse?

The release of gold into the markets by western central banks, through both overt sales and leasing to bullion banks, is beyond all doubt, except for the opaquely hidden details and the refusal to admit them to audit.  And the odd positions in the futures markets are knowable, but also shrouded behind a stonewall of regulatory intransigence. But otherwise he raises a number of excellent things to think about.

All things will be revealed with time.

And here below are two charts that someone sent my way which I found to be disconcerting.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.   Until this is done, neither stimulus nor austerity will have any lasting, meaningful, and positive effect.