Royal Bank of Scotland to investors: 'Sell everything'

Wednesday morning, Janet Yellen's prepared remarks before her 2 days of testimony completely backed off of all the "hawkish" talk of the last month or two. She did a complete reversal and signaled to markets that they are NOT going to stop spiking the punch bowl as she (and in a coordinated effort, other central banks) had started to hint at -- same BS act we have been getting for a few years now. They signal that they want to stop injecting massive amounts of liquidity into markets as they have been since 2008 (which has blown massive bubbles all around us), then freak out when markets start to react (in this case, it was global bond yields and currencies starting to create turmoil). ... and they give the high sign that the casino is still open. Markets are happy to take their cue, and ride it as far as possible. It's easy money.

This morning, we got a massive economic data dump and it was bad again -- from consumer spending to core PCI to consumer sentiment (soft data) which disappointed. The market took it its cue -- bad news is good news in the phony world they have created, because the bet is that they will not be hiking rates as much as they have tried to threaten, and nobody believes they are going to let their balance sheet roll off -- they'll believe it if they ever see it. The Fed has hiked 25 basis points a couple of times over the last 2 1/2 years, but monetary conditions are now looser than they were 5 years ago, because they are not keeping up with real rates. What they have done is criminal -- whether you get it or not.

Meanwhile, the economy is growing ridiculously slowly by historical standards (when fundamentals are driving stocks or high yield prices, a slow economy is not a GOOD thing), multiples on stocks are at ridiculous levels because earnings aren't driving equity markets, artificial liquidity is, and margin debt is at all time highs -- as this has turned into a casino being fueled by how cheap it is to borrow, not anything fundamentally driven. The VIX (measure of market volatility) has been pinned at low levels -- because of the level of complacency they have created. You have complacency, ridiculous valuations and people borrowing because it's "easy" money. History is rife with the disasters brought about by this formula. But right now, lots of day traders are making gobs of money shorting the VIX, for example. What can possibly go wrong? They have no clue how ugly this is going to get when it implodes (whenever it happens), just as people flipping houses the last time around (which was built on relatively small debt levels compared to the leverage they have stupidly created now) had no idea that they were going to get wiped out, and the misery it was going to bring on everyone else as the economy paid the price.

That isn't me being Doctor Doom for the sake of the cartoon you are intent on trying to create around me. It's me being a sane voice. I know you don't understand it, but we are swimming in HUGE asset bubbles that have been built on a huge run up in debt. This has taken a decade to build up, and anytime over the last 3 to 4 years or so (roughly), it could have imploded -- in terms of the stock market, valuations are now in insanity land, and however much longer it goes on, we're on borrowed time. When it ends, it is going to be very ugly. I know you don't get it. But you are trying to mock something, and can't even address what I am ACTUALLY talking about. I don't cheer lead what they have done to blow a stock market bubble globally, not because I really give a shit about how high or low the Dow Jones goes, but because we are heading toward a credit crisis BECAUSE of what is behind the run up in stocks.

 

You are just wrong. The economy is doing poorly -- we are in a decade-long depression (or using the Fed's own euphamism for the what they did to Fubar things, we are seeing "secular stagnation."). You can't have it both ways. The stagnant economy has been their rationale for all of the debt (what they call "stimulus") they have pumped in via asset buying and rate suppression -- creating the asset bubbles I am talking about (and a mountain of debt that permeates our economy -- creating possible black swans all around us from a trillion dollars of student loan debt to subprime auto loans that have people with little income driving $30,000 cars). They have told us they need to do it, because the economy can't stand on its own. And even with all of that debt. ... we have been growing at sub 2 percent for a decade. The economy is doing well? Then why is monetary policy looser today (based on real rates) than it was at the height of the financial crisis? We should have seen AT LEAST 300 or 400 basis points in the overnight rate and there is no need for them to be manipulating our debt markets with that massive balance sheet if the economy is doing well.

You can't proclaim mission accomplished, the way you want to, while they are sitting on a $4.5 trillion balance sheet that they can't unwind (as much as they would like to and are trying to talk about now). It's the canary in the coal mine. As long as they are still reinvesting the expiring debt on that balance sheet to keeping pumping money into the bubble machine, what you are doing is telling me that Bernie Madoff was doing a masterful job in 2004.

The Federal Reserve owns 1/3 of all first mortgages in this country. It's unreal -- they have propped up a debt mess they created in the first place by destroying the mortgage asset-backed securities market to price fix it. They have printed nearly $3 trillion of money out of thin air to buy U.S. government debt. I don't know if that is technically a ponzi scheme, but it is artificial beyond belief to create massive monetary inflation and turn around to use the increased money supply you created to buy your own government's debt. That can not possibly end well.

By acting as that massive (and predictable -- so every genius trader can front run them and get them to overpay for the securities they have bought) buyer of those treasury bonds, they suppress yields. Which spills over into every other debt market -- generating the reckless behavior you get when markets no longer can assess risk for themselves. They have created a mountain of debt that is fueling a lot of things even more consequential than a stock market bubble.

On top of it, this goes beyond the Federal Reserve. The Fed largely created its mess between 2008 and 2014 with QE1 to QE3, and with operation twist in there, which was really a fourth QE. Now it is other central banks that have stepped in -- the ECB has been buying 60 billion Euros of sovereign and corporate debt every month unabated, for example, and that money has made its way right into U.S. equities, because with negative yields (European depositors have to pay for someone to hold their money -- it's insane), those people are so starved for the risk-free rate of return they are robbed of that they have been reduced to chasing returns in the most risky places.

There isn't any free lunch. That $4.5 trillion balance sheet is sitting there like a lead brick. They are trying to threaten to try to unwind it. But markets have been (rightfully) conditioned to call bullshit, and are yawning at them, because for 10 years we have gotten threats -- and as I said, conditions are looser today than they were at the height of the financial crisis.

The balance sheet they created is a huge problem, and they can't unwind it without pricking the bubbles they have created -- this ends with defaults and credit crises. With all of the bad debt they are responsible for, even the smallest increase in rates is going to bring about a tidal wave of defaults. Which is why they threaten, and start to back off the minute they see a reaction. They are petrified, and no, there is nothing masterful about the mess they created for themselves and can't get out of. The longer they wait, the more chance that it happens in a disorderly way beyond their control. Whatever the Lehman type event will be.

I saw this the other day: The U.S. stock market is 66% higher than it should be

He pointed out the things I have pointed out to you (so please read it), but the reason I remembered it was this line: "In fact, my experience over the past 20 years and through each of the past two major asset bubbles (the internet bubble in 2000 and the credit crisis in 2008-2009), is that the unanimous identification of an asset bubble did not take place until after the asset bubble had burst."

I keep pointing out the artificiality they are responsible for, and how reckless it has been -- a staggering amount of debt being created by monetary manipulation. With regard to equities (this thread), the fundamentals (earnings, the economy, valuations -- Robert Schiller's CAPE ratio, which shows stock valuations around where they were in 1929 and in 2000 now) don't support stocks anywhere near where they are. I mean, your response could be that valuations don't matter anymore for some reason -- the "this time is different" mantra of the dot-com bubble. But you can't deny that the only way I am wrong about the cause and effect of this having been inflated by central banks, is if there is a weird coincidence between the staggering amount of debt these central banks have brought about and the fact that risk assets are at valuations that make no sense on traditional valuation metrics. If that's the case, sure. It's not the case.