AN ADDICTION GONE BAD, AND YOU

Stocks overreacted to bank earnings this week and reversed their downward trend. Both stock market strength and the averages rose 2% for the week. Gold gained 6%. See below.

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There was a time when big banks were solid indicators of Market condition. But that day is gone. Banks like JP Morgan Chase and Wells Fargo are now hedge funds fueled by the Federal Reserve’s money printing efforts – not economic growth. For instance, trading activity for JP Morgan accounted for almost half of their overall profits. Loan demand remained “soft” in the quarter, and both big banks see future challenges ahead in the lending and interest rate environment.

Truth be told – banks really don’t want to lend money right now. There’s simply not enough money in it (rates are too low). And as the Wall Street Journal puts it, “banks are still struggling to overcome lackluster loan demand, a weak economy and a slew of new regulations.” (See: WSJ on-line: J.P. Morgan’s Profit Rises 31%, July 12, 2013.) Add to this that lawmakers in Washington DC have recently gathered to consider new legislation to “rebuild the wall” between commercial and investment banking that came crumbling down in the ’08 market crash.

First of all, even when there was a “wall” between commercial and investment banking it was easy to leap over. As long as they are connected legal entities they remain one in the same, and therefore, “too big to fail.” The only solution is to De-Institutionalize.

Second, when news like this comes to light I often find myself wondering: Exactly what did Dodd-Frank actually do to solve the “too big to fail” problem? 

American governance can’t keep adding more and more regulations on top of poorly conceived and ineffective laws like Sarbanes-Oxley and Dodd-Frank. It’s choking the system. Loan supply to small businesses is already vacant, and with the specter of more regulations and a Federal Reserve looking to exit the QE program, reason can only expect lending to shrivel even more with time.

That’s problematic for long term economic growth.

Perhaps one of the most disturbing traits of this stock market is how the establishment constantly shrugs off poor economic news. Here’s a sample of news headlines that went overlooked by Wall Streeters this week (from WSJ on-line):

  • China Posts Surprise Drop in Exports
  • IMF Cuts Global Growth Outlook
  • Emerging Markets Hit by IMF Forecast
  • Portugal Resignation Rocks European Markets
  • Fitch Ratings Downgrades France

In a global recession, global consumers purchase fewer goods from dominate manufacturers like China. That’s basic Market dynamics. It also stands to reason that smaller and less developed economies (a.k.a. emerging markets) will suffer more from negative condition than powerhouse economies like the U.S. And if you thought that financial problems in the Euro Zone went away – think again: France and Portugal have just sent reminders of fragility.

Wall Street is famous for getting blindsided by major stock market corrections because they overlook factual trends in favor of momentary pomp and circumstance. Currently they are drunk on Fed stimulus, and thus, unwilling and unable to face reality.

But sooner or later the Fed will lose control over the habit. When Ben Bernanke spoke last time and suggested QE could begin ending as early as September 2013 he sent yields soaring. They remain elevated today, and poised to go higher. See below.

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Indeed, the yield on the 10 Year T-Note is just 2.6%, and low by any standard. A tapering of QE will only send yields higher and stocks lower. Inflation, caused by the Ponzi scheme that QE is, seems to be the only thing holding up “the market” and keeping yields low.

This puts the Fed in a difficult position. They see the asset bubbles they are creating. In fact, that’s what they’re looking to do with QE – to re-inflate the housing market by creating more demand for mortgage debt through new money printings. Yet in the most recent earning’s reports by the biggest banks, Chase and Wells Fargo said mortgage demand is weak and dwindling.

More and more proof that QE isn’t working appears everyday.

The Fed can’t figure out how to end the QE program because every time they talk about terminating it yields spike and the stock market sell-offs. They know what high interest rates will do to the global economy, the Euro, and emerging markets. They also know what it will do to the U.S. market and the investment values of hard working Americans.

And none of it is good.

QE was a fun binge for a while. Then, for a time, it looked like a livable condition. But now it looks like a cocaine habit gone bad. The Fed knows what kind of economic hell looms if they continue abusing money – but they just can’t seem to peel themselves away from another QE fix.

The Fed is addicted to QE and is in bed with their pushers (the Wall Street establishment.) It’s a bad situation destined for a train wreck followed by some harsh medicine. And that’s why the Fed can’t figure a plausible way out of it.

Those who see the wreck coming can sidestep disaster.

Those who don’t will get clobbered, again.

Stay tuned…