Royal Bank of Scotland to investors: 'Sell everything'

All of that margin debt has created a lurking liquidity problem. Markets are not very liquid in this kind of environment -- fundamental investors are sitting on their hands for the reasons I am pointing out. When prices are grinding higher, it isn't a problem. You can tread water or even grind higher on low volume and without a lot of money coming in -- which is what is happening right now. You have seen a ton of stock buybacks -- the phoniest thing imaginable when earnings are declining. What has propped up this market the last few years. Companies can borrow cheap. So they issue debt, and then turn around and buy their own stock with it. Thing about the silliness of it -- they are financially engineering a stock price with borrowed money rather than making capital investments to grow their businesses. And then the people who created this environment are perplexed while the economy is drooping.

In the case of the last 2 weeks, bond yields are spiking and some people who rode that bubble have been scurrying out of bonds and into equities, which created a new marginal high in those indexes. It is short-sighted. With yields spiking (and its notable, because the Federal Reserve is now chasing the market for the first time I have ever seen, not the other way around), it is going to get more and more expensive to borrow if it goes on. We have seen a violent move up in yields in the last month. They are still historically very low, so this isn't the end yet. ... but at the same time, there is a threshold somewhere were people start drowning in their debt (we are over our heads in debt) and can't even afford their interest payments. Whether that is at 3 percent or 4 percent or 5 percent on the 10 year bond is a guess. But it is going to be somewhere in there. A lot can happen before we get there. I don't expect the various central banks to let it happen without trying to keep the phoniness going longer. So it won't surprise me if we see a bunch more negative rate and asset buying schemes as they lose more and more control of the mess they created. They will not give up without kicking and screaming first.

Of course, they can also lose control first -- exactly as they did in 2008. It just takes a catalysts. When that happens, people are going to be bailing on a lot of things. Not just equities. And because they have created a liquidity mess in equities, it will come down very quickly. Anyone who thinks they can play momentum as some kind of long-term trade (and do it on margin) and be nimble enough to bail in time is going to get run over. I think that is a fool's game. So good luck if you really want to play with fire that way.

One way to try to protect yourself as an investor (as opposed to being a trader) is through diversification. Equity markets in the rest of the world are way lagging what is happening here. That said, those international markets are also at very high historical valuations and may correlate with U.S. equities than you they typically would. You are seeing cross risk assets correlating (we are seeing asset inflation almost across the board) in ways they shouldn't. That is the problem with what they have done. They have punished savers and pushed entities into debt. That has driven money into every risky place you can imagine in the search to replace the yield they should have gotten -- which means there are few places to hide, except in cash -- which brings its own set of problems with it. You can also buy options or futures contracts on the VIX which is a volatility index on the S&P 500 or the RVX, which is even broader -- it measures volatility on the Russell 2000 index. Theoretically that should act as a hedge -- when volatility spikes up,and it should provide a little protection on your long exposure on equities. The problem -- and we will have to wait and see -- is that those trades have brought in the gamblers too (just like everything else), so I am not sure how accurately they are going to behave. They may not be being priced right. That is what you get in a artificial market boom driven by endless credit creation -- whether it is yield-yield debt, equities, real estate, etc. When it ends, there is no place to hide.

 

You mean a market top, not bottom.

The person above me said, if you had bought the bottom when the market blew off in January, today you'd be sitting on X percent gains. Indeed. And if you had sold the previous top in 2015 and bought back into that sell off, you would have been sitting on a similar gain.

And unless you are Kreskin, you are not trading that way. I was just pointing that out. It's kind of a meaingless way to look at it except on a message board.

I totally get where RBS was coming from. They thought they saw the catalyst that was pricking the bubble when people started to freak over a debt implosion in China. They were wrong. But I am not trying to time it that way.

The way I look at things -- pretty much for more than 2 years now, even though I saw no definitive catalyst in sight --- yeah, they can inflate this thing farther. They could announce QE4 tomorrow, justify it with bullshit, and maybe the market rallies more on the back of more credit. But the downside risk is way greater than any incremental run I am guessing is there. I am not trying pick a market top and get every penny from it. I am trying to get out of the way of what I know is going to be an avalanche.

The thing about it is that we are trading sideways for the most part. You wouldn't know it, though, from reading this board. From the previous top at around 2134 on the S&P that we saw in May, 2015, you have squeezed out 3 percent to where we are today (but not including dividends -- so your total return is higher than that 3 percent if you own the index). You have also ridden two violent sell offs as things started to buckle, too, which unsettles most people. Maybe the S&P keeps going -- maybe they get it to 2250 or 2300 by finding away to keep rates suppressed a little longer and hold off the debt markets from repricing on their own.

But I don't want to play that game of chicken -- trying for what may be a relatively small incremental gain that may be left in what is really a manipulated casino, when the downside risk based on every fundamental measure of valuation that I know is MUCH greater than than incremental gain I am guessing is likely still left. I am not gambling or leaving my monetary health to chance. I am looking at realities and playing odds.

Look at the P/E ratio for the S&P 500 on a trailing GAAP basis -- not the bullshit non-GAAP forward estimates (that keep getting revised down anyhow!) people have been trying to use to justify a run up in equity prices. The P/E ratio is pushing something like 26, 27 times earnings now -- on a trailing GAAP basis. Historically, that number is closer to 15 times earnings. Stocks are VERY expensive by any historical metric. Worse, though, this is happening as earnings have now DECLINED 5 quarters in a row and economic growth this year is sub 2 percent. Stock prices would be going down for more than a year (not just sitting sideways) in a market predicated on price discovery in those conditions -- if we were at a normal valuation. Now add to it that we are at a ridiculously expensive valuation.

What we have right now is predicated on interest rates staying near zero. Which is artificial. If they find a way to keep that artificial environment in place for a bit longer, I'll gladly sit on the sidelines and not play for the incremental gains that may be left. You are gambling if you play that game. Because the downside when they lose control and the actual market steps in to price things is way greater than I think some people on here realize.

 

Rates set by a free market are NOT artificial. They are the product of price discovery, not price being dictated or administrated by a person or a group of people as part of a price fixing scheme.

That is the essence of a central planner dictating the price of something. It's artificial. It is a price fixed market.

 

You have to infer it. ... the way you need to infer what the price of toilet paper would have been in the Soviet Union in a non-command economy. The silliness of having to point that out is that we can test it easily. Take away their forced monopoly over the money supply, and take away the dictatorial powers they are allowed to price fix the market for interest rates using their crude methods (clearcut guidelines -- must be a euphemism for contradictory bullshit that swings all over the place based on political whims). ... and allow the free market to arrive at a rate of interest based on honest price discovery.

You can guarantee with 100 percent certainty, if that happened, rates would rise rapidly to a level much higher than where they are being price fixed right now using every crazy "kitchen sink" method possible (rates are negative in a third of the developed world -- the first time in recorded human history!). It also would cause a massive deleveraging to undo the mess they made of the world -- and A LOT of pain to pay back for the last couple of decades. Savers wouldn't be being punished to encourage more and more debt to prop up the mess they created. It would also ultimately unleash the global economy out of the depression they saddled us with -- all of the misallocations of capital those idiots have brought about (and a stock market at crazy valuations is a small part of it) could unwind and money could find its way to places that offer the BEST reward to risk possibilities as determined by an actual free market *gasp*.

 

Yelling at me, "This is the way it is, this is the way it always has been," ignores history. And I am not in denial of anything. I am the one actually pointing out reality.

The U.S. has been through how many central banks in its history? How many of those had a basis in some kind of sound money principle (relative to what we have today -- which has no basis in anything except endless bullshit)? How did our country fare before the Federal Reserve system relative to how it is faring today?

History doesn't bode well for the Federal Reserve system. There is absolutely no permanence in this thing you are enamored of, any more than the Soviet Union had permanence in the 1950s or 60s. It was just a matter of time.

The Federal Reserve system is also a relatively recent construct. In the overall history of money it is a blip -- and a massively contrived blip. The problems with giving monopoly power over the money supply to a bunch of politicized appointees who manipulate prices via private banks, have always been there -- at least lurking. But they practiced relative restraint during most of the mid 1900s, because politically their power was kept in check. It allowed the Federal Reserve system to exist without bringing itself down.

That changed -- for the most part with Alan Greenspan. Politicians realized that massive monetization of debt allows them to run up trillions upon trillions of dollars of debt. And they have a price czar (that they appoint!) at their behest that has been all too happy to monetize all of that debt over the past several decades. You keeping saying something about a "dual mandate." You might as well as tell me they have been charged with dribbling a football. They have no ability to steer the economy with any precision (let alone better than the economy would behave if left to actual price discovery) -- and in fact, their efforts at doing that have created mess after mess. Part of that mandate is price stability -- yet, the currency they have a monopoly over over has lost 99 percent of its value (that isn't an exaggeration; the cumulative price inflation since the Federal Reserve's advent is something like 2500 percent!) since they were created! Either it's a bullshit mandate, or they are abysmally bad at doing what they say they exist for.

It was relatively OK for most of their existence, when they were just involved with efforts at actually moderating the business cycle. Not that they actually could -- but what they were doing around the margin of short-term rates was relatively quaint compared to their hamhanded bungling today. You seem clueless to the politics of what they have become. We have been running up trillions of dollars of debt -- public and private. The people you think are Jesuses who can manage an important aspect of our lives better than we can ourselves. ... are appointed to MONETIZE all of that debt. That is their true mandate. It's the only way you can keep playing that game of more and more debt to live a fantasy -- until time runs out on the clock.

The rest of the industrialized world having adopted similar reckless behavior isn't a selling point. Japan, for example, is sitting at debt levels that are greater than 200 percent of their annual economic activity. Their central bank has furiously embarked on every scheme it can devise of to keep interest rates negative-- lest the debt mess come crumbling down and they have to face the reality of a serious deleveraging and years of economic malaise as payback. Meanwhile, they are in a never ending depression -- what they have done has put a permanent anchor on their economy. My question is, why would anyone emulate that (other than doing it a series of short-sighted kick the can down the road measures)?

Forget whether that is how you SHOULD try to fix the price of money. I can argue for price discovery and free markets easily -- because they are more efficient than price fixing schemes a la what the Federal Reserve does. But on what planet does that create any good. ... when you have no system of sound money stopping them from creating massive monetary inflation, and their sole purpose has become to monetize more and more debt creation to live a fantasy? We have pension funds that are never going to be able to meet their obligations due to what you are arguing for. Stop spouting canned terms like "dual mandate" and THINK for a minute.

 

They were created to stop financial panics (or is it a noble sounding "dual mandate" that has no basis in reality?). ... Of course we have gone through the great depression and what we are dealing with today and a series of escalating financial panics before that. But chalk it up to their "inaction."

An honest look suggests that they are the problem. What happened in 2007-2008 (and ever since) was brought on us by their attempt at monetizing debt. They created massive misallocations of capital by skewing risk in various markets. They created the panic you pointed to -- and then like the arsonist riding in on the fire truck -- they have made it worse in the aftermath.

Monetary policy is bullshit. For the last decade "monetary policy" has amounted to, "We are drowning in debt. We choke on our interest payments and face massive defaults unless we keep interest rates pinned near zero."