The Bullish Case For Stocks (and a Commensurate 'Repricing of Risks' Caused By Fed Intervention)

Here is the 'bullish case for stocks' from Ralph Dillon at Global Financial Data, in quotes below.  The chart is also from their site.

Calculating the Equity Risk Premium Tutorial is here.

Those of us who stood by and watched the Fed blow asset bubbles in financial paper and the housing market from 2003 to 2007, after the bubble in tech stocks from 1998 to 2001, are understandably appalled that the Fed has seen fit to follow essentially the same game plan again, matched by a lack of reform in the financial system. 

Bernanke's policy failure is, in my humble opinion, going to cause another financial crisis if he continues on. There are much more effective ways of reflating and stimulating the economy than creating paper asset bubbles for Wall Street, and hoping that the Banks allow for a trickle down effect to the real economy.  Not a chance when gaming the markets can produce outsized profits and perfect trading records.  Where is the downside, where is the risk?   And where are the regulators?

I think I understand the rationale for leaving the TBTF Banks in place, and making them even bigger. It was two parts craven self-interest and one part backstop for the eventual unwinding of the Fed's Balance Sheet, when someone has to help them to absorb the trillions in mispriced paper.

In my opinion Bernanke is literally fighting a new kind financial crisis, of the Fed's own making, with the last war's tactics and weapons, in the manner of the French generals at the beginning of the Second World War. Therefore the next crisis could be quite impressive and pervasive, affecting sovereign debt and currencies to an even great degree than the last two or three bubble/crises, depending how one is keeping score.

The failure points, or limits if you will, are the valuation of the bonds and the US dollar. And Bernanke looks to be giving those limits, and the theories of risk and valuation therein, a rather rigorous stress test. 

"At 85 Billion a month, massive amounts of liquidity are driving the markets higher each day. While we are closely watching the FED for signs of an exit strategy, I heard a very interesting piece from David Tepper at Appaloosa Management this morning that put todays markets in a much better perspective. According to David, The FED will have a 368 Billion dollar surplus this year! That is 368 Billion in more liquidity that “has to go somewhere”.

With the Dow and the S&P 500 trading at or near all time highs and 10yr paper trading at historic lows, you would think that we have run our course and we may want to pull some money off the table. Think again? Do you fight the FED? Do you create the MOAS? (Mother of all shorts)….Or do you stay long?

In this chart, we look at the Equity Risk Premium Index versus the DJIA, S&P 500 and the US 10yr to 1885. The red line represents the Equity Risk Premium Index and by all accounts, looks like it is ready to breakout and make a move to new highs.

Provided that the FED follows through to 2014 with the QE program, one would have to assume that the respective equity indices will all move higher with the massive amounts of liquidity that are in the pipeline.

That has proven wise, as long as the FED stays your partner."

Currency Wars: Russia's Proposal for the Post-Bretton Woods II Global Financial System

"The great enemy of clear language is insincerity. When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.

In our age there is no such thing as 'keeping out of politics'. All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia.

When the general atmosphere is bad, language must suffer."

Eric Arthur Blair

The dollar reserve system has been struggling, if not failing, in stages for at least ten years now.

There have been a series of financial crises since the mid-1990's that are related to the strains of an unsustainable reserve currency system which is no longer able to 'emulate the gold standard,' as ex-Fed Chairman Greenspan described it. 

This situation is a macrocosm of the failings of the Eurocurrency zone as it is presently constituted.

I believe that the ultimate solution will be to migrate global trade to a super-currency, constituted of a basket of currencies and most likely a metal or two, gold and silver. I have been calling it the 'SDR' but that is only a representative description. It is unlikely that 'ownership' of such an important instrument will be given to the IMF unless its management is opened up to a broader representation of countries and their interests.

This relieves the 'owner' of the currency from the need to run trade deficits in order to support the expansion of global trade, and allows them great freedom in pursuing domestic monetary policy without risking the global markets. cf Triffin's Dilemma.

There is a strong push from the Anglo-American banking cartel to maintain the status quo, for what are surely selfish reasons. A strong dollar and the dollar as reserve currency is a powerful tool of financial and political policy, even though it may take a toll on some segments of their own domestic economy. The bankers benefit, and the politicians are somewhat captured by their well-funded lobby. And so we have a bifurcated economic structure in the financialized economies of the US and UK. And this suits the financial elite quite well, but hardly anyone else.

This has come to resemble a form of financial neo-colonialism.  And I hardly think that this is an overstatement of the situation, especially if one considers the meme of 'economic hitmen.'  But this involves more than just the currency.  It includes the interwoven apparatus of the World Bank, the IMF, the Federal Reserve and its clients, the dominance of multinational TBTF banks that enjoy strong government subsidies, the three major US credit ratings agencies, and the NY-London metals complex. And this Frankstein's monster is tottering badly, but seeking to sustain itself at all cost.

So let's see how this goes. Expect the fog of war to remain, and perhaps thicken.  I have rarely read more economic misinformation than I have read with regard to money and exchange rates and the current issues facing the world's economy today. Discourse has been polluted by self interest and corruption.

 But now that moe people are waking up to this, I would look forward to additional recognition and discussion of the ongoing currency war. But I doubt most of it will make much sense until there is another crisis and the day of reckoning arrives. To paraphrase a saying, those who are capable of an oligarchy are capable of the perjury to sustain it.

You might click on some of the category links at the bottom of this posting to obtain past articles on these subjects.

Russia's Plan For The BRICS To Dismantle The Dollar System
By Valentin Mândrăşescu, Editor of Reality Check @ The Voice of Russia
May 12, 2013 at 3:38PM

Former commodity trader, economist, journalist. Nomadic lifestyle. When not in Moscow, he can be found travelling across Eastern Europe. Areas of interest: world economy, East European politics, and the theory of propaganda.

The status of the US dollar as the world reserve currency gives the US a number of advantages over other countries. The world’s most important commodities are priced and traded in dollars, even if most of these commodities are not produced in the US. The fact that the world’s financial system is based on the dollar allows the Federal Reserve to export inflation to other countries, while the Federal Government runs a huge deficit with impunity.

So far, only China has been active in challenging the dollar supremacy. The internationalization of the yuan is an official priority of Chinese leaders. Currency swap agreements with major trade partners like Brazil, France, or Australia are small but important steps in the Chinese strategy. Changing the world financial system is not an easy task and certainly a very challenging undertaking for China. Now, it seems that Beijing has found an ally in the Kremlin. And there appears to be a consensus between the BRICS countries: the urgent necessity to dismantle the dollar system.

A week before the recent BRICS summit in Durban, the Kremlin administration has silently produced a document which describes the Russian strategy in the context of BRICS cooperation. The document makes for a fascinating read for anyone brave enough to plow through the dense Russian legalese. The strategy has been designed in the “inner circle” of Vladimir Putin’s team, so it is safe to assume that it represents the official view on the BRICS future...

Read the entire article here.

Gold Daily and Silver Weekly Charts - Brad DeLong: 'Bernanke Defines What the Market Is'

"For the greater good, I want to do what must be done."

Dolores Umbridge

Brad DeLong, the Berkeley history of economics professor, said on Bloomberg TV today that Bernanke is 'the whale that can't be harpooned.'   

And hedge funds missed an easy trade by not going along to get along by riding the rising markets.  Those that are fading Bernanke are going to be overwhelmed by his power.  So just follow the Fed's guidance, obey, and get rich.

As Brad says, and I quote,  'Bernanke defines what the market is.'  

That is a fairly profound statement, containing certain judgements and assumptions, if one thinks about it.  So much for old fashioned concepts like price discovery. Wasn't there some lesson in this most recent financial crisis about the mispricing of risk?

I cannot say I was entirely surprised, because Brad also derided the moral hazard objections to the TARP, when it was proposed by Hank Paulson on a single sheet of paper, as puritanical.

What would we call such an intellectual position, that the Fed has and should have the power to define the market and what it is?   

It is a big ironic that the omnipotent Fed doesn't hesitate to claim cluelessness and non-involvement after something in the economy blows up, generally a bubble of their own making whether they admit it or not.

I don't think Bernanke is a whale. I think he is the captain of the Titanic.  And I think that Brad aspires to a position on the bridge.

We all understand the theory of a modern money which can be created and distributed at will, whether it be by a central bank or the Treasury. And control of the world's reserve currency is certainly what some might call an 'exorbitant privilege' of power. 

Bernanke and the Fed may be powerful.  But they do not control the whole world, at least not yet.  And so their power may have some boundaries.  And if those boundaries are transgressed, the result might be rather memorable.

I suppose we could turn to someone with a knowledge  of the history of economics for examples of that.  But perhaps not the history of economics professor from Berkeley.

Hedge Funds Receive Bernanke's Market Decrees, Janet Yellen Escorts Them Out

SP 500 and NDX Futures Daily Charts - Complacency Buys the Dip

Or as Brad DeLong, the blogging Berkley economist said on Bloomberg today, the Fed is the market and don't fight the Fed.

Net Asset Value Premiums of Certain Precious Metal Trusts and Funds

The premiums are pressed rather heavily, reflecting both short selling and a type of capitulative pessimism.

As you know I tend to view 1420 as key downside support for gold.

Gold Daily and Silver Weekly Charts - Acts of Desperation

"It is not at all uncommon for someone to arrive at a scene of brutality or injustice and, with a sympathetic murmur or heroic flourish, attack the victim."

Renata Adler

Intraday gold tagged the 50 percent retrace of its rally off the bottom, and then bounced back.

From everything I hear all these paper price declines are met by heavy physical buying. The jokers may have overplayed their hand.

The potential 'bull flag' is gold is very much intact.  The rally from the bottom has now been retraced. 

See you Sunday evening.