“A healthy strengthening bull market
is accompanied by a large number of stocks
making moderate upward advances in price.
A weakening bull market
is characterized by a small number of stocks
making large advances in price,
giving the false appearance that all is well.”
The stock market trend is up.
The Bullish Percentage of SPX is down.
New Highs decreasing vs. New Lows increasing.
Percent of stocks above their 50 Day Moving Average is down.
Another high with another divergence may occur
Out of control ?
By printing money
it is hoped to:
–Replenish bank reserves
–Hold interest rates low,
to moderate interest payments on treasury loans,
and to encourage home purchases
–Raise the stock market.
By keeping rates low
and paying interest on bank reserves
the banks have been successfully induced
to withold commercial loans
thereby holding the economy in check
and so, in spite of printing,
holding money velocity low
and so, keeping some pressure on inflation.
Jun 27, 2013
“the Treasury sold $35 billion in five-year notes
to the lowest demand since September 2009,
with a bid-to-cover ratio of 2.45 times.”
“The April TIC report showed
a shocking drop in foreign ownership of US government debt.”
“the selloff [in the bond market]
has now reached the status of the worst ever bond market selloff
(of 90 days or less)
in percentage terms.
“Since May 2nd 2013,
10-year yields have risen from 1.626% to 2.609%,
a 98.3bp selloff
which means that yields have risen 60.5%
in less than two months”
–“There are more than $12 trillion paper dollar assets
(stocks, bonds and cash)
held by foreigners outside the U.S.”
if this is the start of ‘recognition’
and foreign holdings of US paper is offloaded
rates will substantially rise
–“the global derivatives
have increased in size from $100 trillion in 1998,
to $1.2 quadrillion today.”
and the majority of those derivatives are interest rate swaps
and that the banks have sold the fixd rate,
and hold the variable rate
the effect of rate rise, on the banks,
on which the world economy relies,
will be catastrophic,
and the expense to the treasury
will be far greater than tax income will cover.
Except for a miracle
this implies immanent western world
deflation on bank collapse
or hyperinflation on attempts to print
to cover bank or treasury payments
or simultaneously, both.
Why QEs *must* continue.
If rates rise
changes in outstanding ‘interest rate swaps‘ means derivitive mkt disaster.
ie iaw w the interest rate rise
JPMs & GSs variabl rate payout would rise
abov the rate they are receiving
from the fixd rate instrument they sold
resulting in *major* losses
affecting the US financial system
also, It is a fact that
in the US and Europe tax revenues do not cover
retirement of debt and govt spending;
so, borrowing to cover bond rollover and new expenses,
by issuing bonds, is required.
But if the necessary borrowing,
under present conditions of:
–large scale borrowing,
–poor economy [poor tax revenues], and
–hi debt to GDP ratios,
would cause hier rates:
“Imagine what the US economy would look like
with the base rate set to Italian levels of six per cent.
Asset values from bonds to stocks to real estate would be decimated.
[cause of inability to pay off the debt at such hi rates
and the fall in asset values]
depression would set in.”
Therefore, to avoid such a rate rise
printing *must* continue
so so that govt can buy back its own bonds
at higher prices than other bond buyers would bid
ie hi bond prices = lo int rates.
ie the deficits must be monitized
The handwriting on the wall:
1. “The fed has become a significant buyer of debt,
purchasing some 75 percent of US treasuries last year
because there were no other buyers.”
2. LTRO, the ECB‘s longer-term refinancing operation
[which has now loaned out above a trillion dollars]
lends banks cash at about 1%
by loaning against sovereign bonds
that those banks currently hold,
so the banks can, in turn, lend to their domestic governments
by buying newly issued bonds.
The question is not wether QEs [printing] will continue,
the question is,
Is there a way to get off the merry-go-round ?