The lack of follow-through after the Fed’s historic announcement last week leaves us wondering:

Have equity investors already priced in “QE Forever”? If so, is there nowhere left to go but down?

We will leave that thought on the table… get up… and look out the window.

It’s been six years since Bear Stearns went broke and five years since Lehman Bros. declared bankruptcy. What, exactly, has changed? 

We wish we had been there. We would have loved to see the look on former Bear Stearns boss Jimmy Cayne’s face. He was once the richest player on Wall Street, with a stake in Bear Stearns worth more than a billion dollars. 

In July 2007, he was playing bridge in a championship match when executives of Bear Stearns came to the table.

“Uh, Jimmy… can we talk to you for a minute?”

“Not now. Can’t you see I’m in an important game?”

“But Jimmy, there’s something you should know… something that can’t wait.”

“All right already. What is it? Blurt it out, man!”

“OK. We’re broke. Two of our hedge funds collapsed last night. We’ve got no choice. We’ve got to seek Chapter 11 status immediately.”

Poor Jimmy. That moment marked the end of his greatness… and prefigured the Great Deleveraging, which would begin a year later when Lehman Bros. bit the dust. 

Cayne later sold his billion-dollar stake in Bear Stearns for $61 million — and he was lucky to get that. 

As every sentient biped knows, the developed world entered a financial crisis in 2008. Actually, the first cracks appeared a year earlier with Bear Stearns and distress in the most junky of all junk debt markets — subprime.

By 2007, this toxic debt had fallen so far below prime that you couldn’t find it with a metal detector. Besides, there was no metal — precious or base — in it. It was all paper. And the paper wasn’t worth a fraction of what people had paid for it.

But the Lehman bankruptcy marked the beginning — and, as it turned out, the end — of the Great Deleveraging. 

Thereafter, the feds were on the case… sandbagging the levies… dusting the forests with fire-killing chemicals… drilling escape holes for those trapped below the surface… pushing the debris out of the way… and in general making sure that the disaster was held in check.

For this, an adoring press awarded them hosannas and hoorays. Their photos appeared in popular business magazines along with captions describing them as “heroes” and “geniuses.” After all, the federal emergency workers had not merely pulled Goldman Sachs’ nuts out of the fire; they had saved an entire civilization and way of life. 

They were successful in preventing a Great Depression. Everybody said so.

Was there ever a better time to be a central banker?

The press took their words… examined them carefully… and uttered not a critical word. And no one mentioned that the words were hollow, meaningless or plain stupid. 

Instead, people thought they were being cagey… or intentionally opaque… as though the bankers were playing such a high-stakes game that they were not under any obligation to let their employers know what the hell they were actually doing. (An art mastered by none other than “the Maestro” himself, Alan Greenspan.)

And now we look around and wonder: What has improved? How have the problems, imbalances and excesses of 2007 been addressed?

One big change, perhaps, is the real estate market in the U.S. It is no longer so bubbly. Ordinary people no longer expect to get rich by buying residential property. Now, it’s the turn of big private equity outfits such as the Blackstone Group to try to make a fortune on bricks and mortar. (The group’s real estate division now has a staggering $64 billion in assets under management.)

Apart from that…

The big banks… have they been broken down and broken up? 

No. They’re bigger than ever.

Health care… education… defense… finance… Have the zombie sectors been brought under control? 

No. They are more out of control than ever. And they’re devouring an ever-larger piece of GDP.

And has excess debt — the real cause of the 2008 financial crisis — been eliminated, or at least reduced? 

Don’t make us laugh…

n the U.S. private sector, debt has been cut back… but only a little. The household savings rate rose to 6% immediately following the crisis. Now it has slipped back to about 4%. 

And total debt (public and private) is higher than ever — thanks to “help” from the feds.

According to former chief economist at the Bank for International Settlements William White (one of the few economists to accurately predict the subprime meltdown), total debt in the developed countries as a percentage of GDP is 30% higher now than it was in 2007.

The feds decided to fight fire with fire. To solve the debt problem, they added debt! The genius of this plan was, we admit, not immediately obvious. But over time, the elegant brilliance of it has practically blinded us.

The feds have always had one overriding goal: to transfer money and power to themselves. They create no wealth. They can get it only by taking from others. The crisis — which was nothing more than a natural market correction in an unnaturally extreme debt cycle, caused largely by the feds — gave them cover for larceny on an even grander scale. 

TARP, QE, ZIRP, Operation Twist — none has had a net positive effect on the real economy. 

Debt is the problem; each of these fixes has left us with more of it. Obviously, that’s not the way to fix things. But from the feds’ point of view, the program has worked beautifully. 

Had the correction been allowed to run its course, deleveraging would have wiped out many investors and many companies — especially in the finance sector. 

Instead, thanks to the feds’ interventions, they are still in business… still profiting from the feds’ debt-friendly policies… and still recycling much of the cash back to the feds. 

News flash: The feds’ easy money goes into the pockets of their friends, clients, supporters — and into their own pockets, too. 

Meanwhile, in the real world, people are struggling. From Bloomberg, a sobering story of a 77-year-old former vice president of marketing for Oral-B who’s been forced to flip burgers to make a wage:

“It seems like another life. At the height of his corporate career, Tom Palome was pulling in a salary in the low six figures and flying first class on business trips to Europe.

“Today, the 77-year-old former vice president of marketing for Oral-B juggles two part-time jobs: one as a $10-an-hour food demonstrator at Sam’s Club, the other flipping burgers and serving drinks at a golf club grill for slightly more than minimum wage…

“Even many affluent baby boomers who are approaching the end of their careers haven’t come close to saving the 10-20 times their annual working income that investment experts say they’ll need to maintain their standard of living in old age.

“For middle-class households, with incomes ranging from the mid-five to low six figures, it’s especially grim. When the 2008 financial crisis hit, what little Palome had saved — $90,000 — took a beating, and he suddenly found himself in need of cash to maintain his lifestyle. With years, if not decades, of life ahead of him, Palome took the jobs he could find.”

Actually, this report has a positive message. It helps settle our nerves. Even at 77, if we make it that far, we may be able to find work flipping burgers! 

Heck, we might like flipping burgers!

But most people will take little comfort from this story. Most people would rather sit at home and collect their pensions. 

But the feds are ahead of them. Reducing the rate of return on safe investments, the feds have taken trillions of dollars from the pockets of people such as Mr. Palome. 

Their savings earn little income. And the pension funds into which they pay their money have a hard time keeping up with their commitments. Deficits grow. Defaults and cutbacks loom. 

Household income is back to levels not seen since 1984. And the number of people with real jobs as a percentage of the working age population has never been lower. 

If this is success… then give us failure!

Regards,

Bill Bonner
for The Daily Reckoning

This essay was originally featured in the Diary of a Rogue Economist

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The USTreasury Bond market breakdown is in progress, all part of the general USDollar global rejection that is taking the world by storm. Of course, residents inside the US Dome do not notice, since they only perceive it as the native currency. From conversations with common folk, discussions with investor types, and general observations for over 20 years, the Jackass belief is that only 5% to 10% of Americans are aware that the USDollar serves as a global financial instrument in contracts, the basis for trade settlement (mostly crude oil), with some extremely important consequences. A major development has begun, much like a metabolic life support system in concert with the Interest Rate Swap derivative contract. For two years or more, the USTreasury Bond market has been deeply dependent upon artificial demand derived from the derivatives. Entire bond rallies have been fabricated with 50:1 leverage, fully supported by the financial network propaganda. Without derivative flying buttress support, the giant USTBond Tower would have collapsed a couple of years ago. Now a new support system has been begun, a dangerous musical chairs long entrenched in the stock market. It has entered the bond market finally. Flash Trading!!

….read more HERE

Over the last few weeks, as the overwhelming majority of economists, reporters, and Wall Street insiders expressed certainty that the Fed would begin to taper its QE program, I did my level best to make the public understand that the Fed would do no such thing. As a result, last week’s “surprise” announcement provides us with fresh confirmation that most market pundits remain clueless about the true state of our economy. I knew, as they seemed not to, that the Fed is caught in a stimulus trap that will require them to keep the monetary spigots wide open. For my efforts I was treated to another round of snickers, eye rolls, and outright dismissals. You would have hoped that they would have learned better by now. 

Fortunately all their dazzlingly wrong predictions are caught on tape. In retrospect it makes for hilarious viewing. Click below to view. 

Unfortunately, they have failed to learn anything from their mistakes. The same pundits that were revered before their colossal miscue are still afforded equal respect. The markets still believe the popular consensus that a Fed taper will arrive in October, or maybe by January at the latest. In contrast, I believe that we are now stuck in a state of permanent QE.   But these views remain in the lunatic fringe. How many more times will the markets have to get it wrong before an alternate reality is considered?   In the end it will not be the Fed that voluntarily tapers by easing up on the monetary gas pedal, but an adverse reaction in the currency and bond markets than forces the Fed to slam on the breaks.

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“Last week saw the D-J Industrial Average and the D-J Transportation Average hit joint new highs.  Ordinarily, that action should present a valid signal for further highs.  Only two items give me pause.  The first is the advance-decline line for the NYSE.  The chart below shows this A-D line running into resistance at a triple-top delineated by the horizontal blue line, which I have drawn in on the chart.

The second questionable item is the D-J Utility Average.  This average appeared in 1929, so it was never incorporated into classic Dow Theory.  Nevertheless, the Utility Average has a history of topping out three months ahead of the rest of the market.  Although, on occasion the Utilities have topped out simultaneously with the rest of the market.  I show the Utility Average below, and it does indeed appear to have topped out.

I almost hesitate to write the following, but I will report that after reading the latest edition of Barron’s from cover to cover, there was no mention of the possibility of the stock market having topped out last week, even with the surprise report that the Fed was not tapering.  I’m not going to go into the “why’s” or “how comes” of the Fed’s decision, let’s just watch the market and see how it acts.  

On the day the non-tapering was announced, the Dow ended the session up 147 points.  The following day the Dow was down 40 points.  My reaction was, “Maybe the ‘smart boys’ are selling into the bullish action created by the non-tapering news.”  I wondered if the rally would resume on Friday, but no such luck.  On Friday the Dow dropped 185 points.  This second day of selling had me sitting up and paying attention.  Could the pros be selling into the good news?  And if that was the case, what can we expect this week?

So how are things at the company level?  For the answer to this, I turn to mighty Walmart, the nation’s biggest employer and the nation’s largest retailer.  The recent action of WMT has my attention.  The long rising trendline has been violated and now WMT has rallied back to contact the underside of the trendline.  So far, so good?

Below is Apple, the glamour stock of 2013.  They’re out with their new iPhones, but the stock acts “funny.”  In the most recent action the stock sank below its down-pointing trendline, and then it gapped down from there.  Apple was up big today on news of great weekend sales from the new iPhones.

Can’t forget gold.  I continue to believe that gold is building a powerful base.  Note the rising bottoms on the chart.

Big Picture — The US doesn’t pay off its debts, it simply rolls them over.  Since the US continually runs deficits, it rolls over its debts on an ever-larger compounded basis.

The debt of the US Government is now $17 trillion.  The debt is increasing exponentially, and we can assume that it will double in about 7.4 years.  Furthermore, unfunded liabilities such as Social Security and Medicare mean that the total debt is closer to $100 trillion, and some say $200 trillion.  

It’s an amazing Ponzi scheme run by a government that has run out of answers.  The current players in this sad scenario are all over 50 years of age, so they will not be around when the national debt runs into a stone wall.  I believe the current thinking is that we can roll over our national debt forever, and there will never come a time when we will be forced to “settle up.”

As I see it, ultimately, a totally new monetary system will have to come into being.  And there may have to be a moratorium on all world debt.  At that time the last man standing will be tangible wealth — gold, silver, gems, great works of art and collectibles — but these are just my guesses, since we are moving into a world of unknowns; the only known factor being that the nation’s debt is compounding into a monster that defies financial description.

Russell opinion — Barrack Obama’s presidency is effectively finished as is Ben Bernanke’s Fed career … I think Bernanke just wants to get out of Washington alive.  Now he can make real money giving speeches, and maybe writing a tell-all book for five million dollars in advance.”

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About Richard Russell

Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late-’50s through the ’90s. Through Barron’s and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974.

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