Royal Bank of Scotland to investors: 'Sell everything'

Sorry, BT. You having asked that got lost for me until just now.

Stocks have not run up on 401(K) money that has to be put to work. That money will disappear like a fart in the wind the minute the momentum disappears -- just as it did in 2009. Just as it always does. It's always hot money as long as prices are rising. When they stop rising you are left with crazy expensive valuations and the world sobering up. ... People panic. Everyone trying to sell and no buyers. ... until valuations come back down to reasonable levels, and then you get buyers back in. Right now, by any metric you can think of (I can share in detail, as I have in the past), we are sitting with insane valuations. Which is why I am certain they will revert to the mean at some point.

This is reality. Stocks have run up on excessive speculation on the back of more and more money creation and credit expansion. Look at the graph regarding M1 I posted a few pages back for the visual representation. The more debt, the more speculation. It's not just the stock market. It was the art market. Real estate markets in cities where the speculative money has flowed. Every speculative asset there is -- rare wines, sports cars, etc. Silicon Valley companies that got to insane valuations (no earnings, but valued at billions of dollars based on BS -- not unlike the pets.com stuff in the public markets in the late 90s). Bonds -- particularly high yield, because the interest rate suppression drives people struggling for income to reach up in risk for yield. It's largely been a rich man's game, because they are the recipients of the cheap money. Joe Sixpack had his run with this in the late 1990s and early to mid 2000s. And now he is shut out. For what it is worth, ALL of those markets have stalled. The central bank tried to push forward on the throttle a little and found out that they need to keep pumping air in the balloon to keep it inflated. Now they are stuck.

As an aside, all of that money creation also reached all kinds of lending purposes not related to speculation (like stocks), although unlike the early 2000s this is not largely a consumer debt problem -- at least not largely concentrated in just one area, the way it was in the residential mortgage market. That isn't to say that consumer debt isn't a problem anymore. It's just not as concentrated in one place and you have a lot of people who went down for the count and have no access to credit anymore at any price. Still, now we have created trillion plus dollar auto loan (much of it subprime) and student loan bubbles on the consumer side of things. ... and on the corporate side, companies borrowing heavily to do financial manipulation of their stock prices. ... stock buybacks -- which has been the biggest driver for the stock price appreciation we are talking about the past few years. These are unsustainable things.

Companies can not make their stock prices rise on earnings growth that we haven't had -- earnings have followed our weak economy. So those companies play the game on the field they are stuck with -- access to unwarranted credit at artificially low rates means they can just keep borrowing endlessly and doing buybacks to drive up their stock prices -- and it creates a bubble (while they pack on more and more debt).

People always want to look for a reason why things are different now -- it's always a new paradigm. But it never is. Historical equity valuations have hovered around certain levels for a reason. Valuations are at ridiculous levels right now for a reason. It's not that complicated. All of the cheap money and credit creation has created a speculative boom. One of two things has to happen. Either they can keep monetizing more and more debt endlessly to keep valuations at artificially ridiculous levels and/or rising forever. Or they will lose control and there is going to be a forced deleveraging that makes what we saw in 2009 look quaint (because the debt levels are now greater). That is going to happen at some point -- either voluntarily or involuntarily. You can not run up endless debt and have a central bank monetizing that debt forever. And that is all that is holding up stock prices at these levels. The only question is whether you are watching the an end finally (and stock prices -- along with prices in all of those speculative areas -- stalled when they stopped QE3, giving pretty good evidence of what blew the bubble and what they need to keep prices rising), or they can blow the bubble longer somehow -- except now it is going to take more extreme measures than what we got in the past to keep creating cheap credit in the face of earnings dropping off a cliff (what intensified last quarter and will continue with this earnings season -- where we are going to be way down year over year). When earnings are drop off like that -- as they have been -- it is a powerful headwind for the Fed. Which is why I think we may be close to an end to the madness.That isn't a "prediction" (although it won't stop more third-grade posts mischaracterizing me) -- at least on a time table. Eventually this comes to an end. But the Federal Reserve has a lot of power to manipulate our markets for as long as they can keep it all propped up. They could announce some new QE scheme tomorrow that goes even beyond the asset buying we have already seen that has blown up their balance sheet. They could directly intervene in the equity market and buy stocks, as Japan did. And maybe that can drive prices even higher -- setting up an even bigger fall eventually.

I am sure you have heard the mantra "Don't fight the Fed!" You don't fight them, even if the valuations they are driving things toward make absolutely no fundamental sense. That kind of thing is not sustainable forever in a permanent way.

We are in the 8th year of an economic expansion (as anemic as it has been) and we are due for a recession (it doesn't happen on a schedule, but this would be a pretty long expansion historically), if we haven't already entered it as all of the crappy economic data we have seen lately suggests may be the case. It's going to take something way beyond the extreme measures they already have resorted to over the last decade to distract markets from that. Can they pull a rabbit out of a hat? Maybe. If you had told me 20 years that we would have seen the asset buying they did in the MBS and treasury markets, I would have thought it could never happen. So who knows what kind of desperate and destructive actions they might resort to next to try to create more time.

I just know that I am personally not playing that game. I will wait them out -- because they will lose control and then a deleveraging is going to happen. And when that happens, equity prices will be the first thing that will come back to reality (as the phony liquidity drives up).

 

First of all, Peter Schiff is not my hero. Those posts are stupid.

These threads. ... I post something -- anyone can respond to what I have to say. Someone incapable of having the conversation nonetheless trails me around from thread to thread putting his inane words in my mouth and telling me how wrong I am about everything -- while calling me stupid names. And you weigh in to ignore my posts and try to tie me to someone else -- ha ha.

Smug condescension. It's rich coming from you. Anything I say, "Nut job." His hero, Peter Schiff! He's wrong!

It's lame.

Second, you don't have a clue about Peter Schiff apparently. Peter is just as right now (in the big sense of things) as he was in 2004, 2005, 2006, s007 when people (supposedly) much more informed than the message board dipshit were doing dumb laughing hyena acts on him. You'd think you'd shut up given how RIGHT the guy was (as much as a media whore as he can be).

This always made good viewing after the meltdown in 2008 / 9. It's the macrocosm of the stupidity on these threads.

Oh, and the followup to that thing from December you just dug up? The guy has been doing a victory lap (maybe prematurely) since then, because he is looking more and more "right" every day as the Fed's shit show falls apart.

 

Did you actually watch the interview? The guy says over and over again that whatever happens depends entirely on the Fed. The Fed backed off. ... as he suggested he suspected they might. And everything depended on them. He expects they will be back with QE4 or some other form of stimulus. And if that happens, they may be able to blow the bubble longer. It's pretty close to what I post on here, I guess.

But all you see is, "He predicted so and so!" Only if you are someone trying to distill everything down to a third-grade narrative. The reason China has stabilized is that the Fed backed off. And the dollar bubble has started to come off. Which has eased the pressure on foreign markets. Just about everything the last few months is playing out the way he was describing it then!

Whether or not that continues is debatable. You want to distill everything into "Predictions!" "Wrong!" But when you have a central bank manipulating the markets via credit creation -- what blew the bubble in the first place and what its survival depends on -- everything depends on what that central bank does moving forward.

Eventually, though, the mess they have made ends up with yet another financial crisis. As that happens, though, you will shift the narrative away from, "Peter is wrong about everything!" the way you always do.

 

I don't get why you even took that thread that way, cran.

Peter has actually been ridiculously right about a lot of things. Not on the dumb market-timing basis you want tomake it about. Or about predictions about what bullshit the Federal Reserve will come up with at any particular meeting. Nobody makes predictions like that. It's like trying to predict when a baby will poop.

But in terms of someone patiently explaining the excesses being created as they were created, spelling out the causes of the exceses, and the likely consequences of reckless manipulation, he can be pretty specific. Until it all plays out the way he suggested, it's hysterical to you how "wrong" he was. Even after he looks the the rightest guy around after the fact. ... you just shift onto, "But 9 months ago he said so and so. ... and make him "wrong" all over again.

It's like Mike Burry creating credit default swaps on the biggest piece of shit mortgages and being 2 or 3 years early on timing the collapse. Markets don't work that way. But if you decide someone is a "nut job" (in that cranberry way) you ignore how smart the guy was and engage in an endless conversation about how he couldn't time it right. Wrong! Wrong! Nut job! Even after he was proven the rightest guy on the planet, you come back trying to make him "wrong."

Fine if you want to sit here and tell me you don't see what Peter has been saying the last few years. ... since ZIRP and the QE programs took this all to an insane new level. It's incomprehensible to me after what we saw in 2008. But fine. If you disagree, at least make the case for why he is wrong (based on what he actually has to say). The guy is pretty specific about cause and effect. The way things look right now in the currency markets and the buckling risk assets have taken, I'd think you want to be careful. You are trying to make this about "Where is the stock market going to be next week," and even if that was even close to the point. ... since QE3 ended stocks have stalled -- and have buckled. With the two selloffs we got last year and this year, we made lower highs each time. If you think that is what this is about, this is NOT victory dance time (which would stupid anyhow). Get some new highs first (and even then, don't do it).

And you are just wrong right now, either way. Stocks aren't going to get significantly higher without the Federal Reserve figuring out how to create more credit or to do some kind of asset buying. That is all that has blown up the valuations. Absent that, at best we stall for a while -- while they try to jawbone off a collapse (what they have been doing). Eventually, you will see exactly which way stocks head. The valuations are a fantasy.

You'd think you'd want to be careful about this -- at least with regard to Peter -- given how that went when he was one of the more visible people being so "wrong" prior to the first act of this play in 2008.