Fed is boxed into a corner

[Sasquatch]

Barron?s 5/24/04

 

Man the Exits: Asset flows are indicating a ?Riot Point.?

 

As the saying goes, follow the money-and right now, where it?s going isn't too encouraging. ?Our investors are selling ALL markets and they?re selling indiscriminately,? say Brian Garvey, senior strategist at State Street Global Markets. ?No one?s looking at the fundamentals anymore; they?re just reducing exposure.? ?What?s of concern is that the pattern of flows over the past two weeks has been quite similar to the fall of 2000, when the euro fell to record lows, and 1998, when Long-Term Capital Management (LTCM) melted down-both periods of risk aversion, Garvey says. Indeed, the ?riot point? began forming in May 1998, three months before global markets ?became dislocated.?

 

Moreover, although the LTCM scare was more or less triggered by the markets, Garvey says, ?this time the risk has been triggered by the policy makers,? who are backed into a corner because they can?t respond to the markets.? ?What worries us is how much risk institutional investors have taken on since last June-so the unwinding process could be much longer than people expect.?

 

[Sasquatch]

BEST OF STEVE PUETZ

 

May 18, 2004

 

The Fed is boxed into a corner. Unlike prior bubbles, the Fed has done nothing to stop the multitude of bubbles that have emerged. Simple math proves that every bubble must eventually burst ? regardless of central bank policy. Examining the situation in the US, the credit bubble has grown to such an enormous size that the Fed?s easy-credit policy is no longer providing desirable results. Instead, consumer price inflation is rising (especially in the gasoline market), the bond market is declining, profits from the carry-trade are eroding, the job market is not improving, and the economy is still burdened with repaying the $35 trillion in debt used to create the bubble. In short, the Fed has lost control, and a massive depression looms.

 

Recognizing the formation of a bubble, central banks usually burst a bubble before it gets completely out of control. But the Fed has proved to be the exception. The Fed has let the multitude of bubbles form with complete indifference. The damage from a bubble is always in future years. Given the magnitude of the current bubbles, the damage will likely translate into a total collapse of the US financial system.

 

In short, any economy based on ever-expanding credit is doomed in the long-term. The size of the bubble dictates the following pain. Judging by the current bubbles, the coming pain will be unprecedented. The Great Depression of the 1930s will be mild in comparison.

 

All major US stock market indices have broken below important support levels. Because all previous bubbles have ended with crashes, the odds are almost certain that the current credit-market bubble will end with a crash. The US markets now stand at the critical "panic phase" of the crash. The short-term over-bought situation increases the odds that the "panic phase" of the crash will start soon.

 

Maintain a maximum bearish strategy. Use 75% of your funds for short positions in S&P 500 futures. Allocate the rest to S&P 500 puts with June expirations and strike prices of 700, 800, and 900.

 

Investment Rarities..

 

[martialcomp]

Sasquatch, that is a GREAT site.

 

Most, if not all, of those commentators is saying that the Fed has created a huge credit bubble and there is no way out.

 

Richard Russell is saying that he thinks the Fed will try manipulating both the money supply and interest rates. But, he thinks that the Fed will only be able to control interest rates for a short time, then they will lose control.

[Sasquatch]

Martial, Investment Rarities used to be called Doom & Gloom - I frequent the site for updates by the various authors, the commentary is not generally available elsewhere except through subscription..

 

On a side note - The one thing the Fed has done that escapes my reasoning is why he apparently thinks that inflation is operationally the opposite of deflation, when deflation results from the overextension of debt even in the face of artificially rising prices. Its very possible the old man doesn't understand the essence of what's in play.

 

During the 1970's - 1980's when boomers were coming of age, there was a vast new consumer in play in the US, complete with goods competition and naturally rising demand, hence pricing power, which led to inflation. Today's forced inflation is not demand-driven, since the healthy consumer is sickened with debt and earning less due to global competition.

 

Naturally this leads to the big question - What is in the Fed's bag of tricks once the inevitable comes home to roost? Whatever is in that bag will need to address a global collapse. This leads me to believe that the only workable answer may be WW3..

 

 

 

[The brown one]

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Maintain a maximum bearish strategy. Use 75% of your funds for short positions in S&P 500 futures. Allocate the rest to S&P 500 puts with June expirations and strike prices of 700, 800, and 900.

 

Investment Rarities..

 

Sas.

 

He really does think it's going to start soon judging by those front month put positions!

[threadbare]

Sasquatch, They're going to try WW3, but will they be able to do that? Govt is still reliant on foreign money for support. If there's a massive dump of treasury bonds, how will the war be financed? I think this is a hell of a lot worse than many people can concieve of because there don't appear to be any solutions, not even the cruel solution of war.

 

But if Kerry gets in, he WILL try the war solution, and if there's any way he can pull it off, he'll do it. It will have to be a multilateral, synchronized NATO effort, sanctioned by the UN, under some phony pretext, but they're going to try so so hard, otherwise they face, as Puetz suggests, something worse than the thirties. My best guess is we face a thirties type scenario, in terms of poverty that extends past 2050, and that's if a relatively cheap alternative to oil is discovered soon. Failing that, the U.S will resemble Chiapas Mexico on a bad day, for a good century.

[phatbubble]

BEST OF STEVE PUETZ

 

Maintain a maximum bearish strategy. Use 75% of your funds for short positions in S&P 500 futures. Allocate the rest to S&P 500 puts with June expirations and strike prices of 700, 800, and 900.

 

Investment Rarities..

 

Sas.

 

He really does think it's going to start soon judging by those front month put positions!

yikes. that kind of reco looks a little risque without a disclaimer the size of a phone book.

 

agree, great site.

[pleiotropik]

" Failing that, the U.S will resemble Chiapas Mexico on a bad day, for a good century."

 

Fat chance of you guys having it soooo good. Chiapas is agriculturally self reliant; the population there will not suffer any important dislocation... Unless you invade it, of course, (5Gb of oil in reserves, reportedly), which i wouldn't rule out. Then all bets are off.

 

 

[threadbare]

Pleio, I understand about Chiapas and expect the same outcome for the G-7 countries. If I'd worded it differently you would have understood. Had this conversation with my brother a couple of days ago. He's distraught about the recent Supreme court decision supporting Monsanto and gm crops in Canada. It's INTENT is to destroy family farming. It's a hellish situation, one that on it's surface is bad enough, but when you look into it, is so unbelievably awful, it beggars imagination. We concluded in this conversation, that one of the benefits of peak oil would be it's curbing effect on agribusiness which relies on global reach and economies of scale. Moving stuff around cheaply will no longer be a possibility. More local and sustainable farming and farming methods might come to dominate again.

 

That's certainly not to say trade won't and shouldn't be important in agro but what we have now is not in any way free trade in Canada. It's an abomination that is framed as a "success" while suicide rates in the farming community skyrocket.

[Sam Adams]

Not disputing anything being said by Mr. Puetz. However, I would take anything said by him with a block of salt. I believe he was a regular poster at Kitco for many years and I often noted him making extreme calls. If this is the same guy he was hounded off of Kitco because of his continual failed calls for crashes and gold in the thousands.

 

If he was the same guy who posted he would incessantly advise to get short usually at important bottoms or go long gold just before it broke down. It happened so often that it became an adage that after he posted it was time to sell the miners.

 

Personally I liked his posts and agree with him 100% but his timing really sucks.

[pleiotropik]

threadbare:

 

I understood your cant... But i thought it was worthwhile to point out that places where subsistence agriculture reigns will suffer less disruptions.

 

Have a good one

 

 

CR