It’s not unusual to read sobering words from the Telegraph’s Ambrose Evans-Pritchard, but his latest commentary is particularly dire.
I wonder to what extent “we have been lulled into a false sense of security by the lack of ‘soup kitchens.'” As the Dow went decidedly under 7,000 today and the S&P sits at 700 — market levels we’ve not seen since I was a freshman in high school (!) — I am more numbed than shocked. It’s hard to believe that six months ago we were at DJIA 11.5K (link). For someone who expected the market to plummet for months only to see it rise or be stick-saved again and again, that it’s now at these incredibly low levels is a bit surreal — not to mention frustrating in that most of my short positions have been closed!
Finally, I wonder what will come of commodities and the dollar. Pritchard seems to believe that the U.S. is still in charge. Is that the case? If so, why has the Fed been so gun-shy about buying Treasuries and flooding dollars onto the system? Or is it similar to us not seeing scenes of rampant poverty — there is just a lag in the inflationary system?
Time will tell all.
Stephen Lewis, from Monument Securities, says we have been lulled into a false sense of security by the lack of “soup kitchens”. The visual cues from Steinbeck’s America are missing. “The temptation for investors is to see this as just another recession, over by the end of the year. But this is not a normal cycle. It is a cataclysmic structural breakdown,” he said.
Fiscal stimulus is reaching its global limits. The lowest interest rates in history are failing to gain traction. The Fed seems paralyzed. It first talked of buying US Treasuries three months ago, but cannot seem to bring itself to hit the nuclear button.
As the Fed dithers, a flood of bond issues from the US Treasury is swamping the debt market. The yield on 10-year Treasuries has climbed from 2pc to 3.04pc in eight weeks. The real cost of money is rising as deflation gathers pace.
US house prices have fallen 27pc (Case-Shiller index). The pace of descent is accelerating. The 2.2pc fall in December was the worst month ever. January looks just as bad. Delinquenc-ies on prime mortgages were 1.72pc in September, 1.89pc in October, 2.13pc on November and 2.42pc in December. This is the trajectory eating away at the banking system.
Graham Turner, from GFC Economics, fears the Dow could crash to 4,000 by summer unless there is a “quantum reduction” in mortgage rates. The Fed should swoop in to the market – armed with Ben Bernanke’s “printing press” – and mop up enough Treasuries to force 10-year yields down to 1pc and mortgage rates to 2.5pc. Monetary shock and awe.
This remedy is fraught with risk, but all options are ghastly at this point. That is the legacy we have been left by the Greenspan doctrine. We are at the moment of extreme danger in Irving Fisher’s “Debt Deflation Theory” (1933) where the ship fails to right itself by natural buoyancy, and capsizes instead.
From all accounts, the Fed was ready to launch its bond blitz in January. Something happened. Perhaps the hawks awoke in cold sweats at night, fretting about Weimar.
H/T to The Mess for the link.