food4: Short capitulation is quite evident. The VIX doppred to 15.50 on Friday. Every time the market wants to even start to correct the cabal orchestrates a futures purchase in order to trigger the HFT 'buy' programs and we finish the day flat or 'green'. It happened twice this past week alone. The manipulation continues. But any market held aloft by artificial means will eventually collapse. The question is when. I admit that they have run the Dow 1500 points higher that I ever thought they could and the S&P over 100 points higher than I thought was possible.
But the factors that will eventually lead to a world wide deflationary collapse are still there. Real estate bubbles in many countries around the world, most notably in China. At the peak of our housing bubble we reached 2.7 X historic fair value. (Based on the 8% historic rental return index and the take home pay vs. house value index.) In Shanghai it is estimate that they are at 8 or 9 X fair value based on these historic norms, and over 3 X fair value in China as a whole. In Vancouver, Canada home prices are an estimated 5 X fair value. There are numerous other examples. Real estate bubbles have a profound negative affect on economies when they finally burst. We are not over ours by any means.
Another major deflationary factor in the USA will be the terrible fiscal condition of the cities and states. There will be numerous defaults on pension obligations. There simply is not enough wealth being created and not enough to tax at the levels required to pay the massive pension obligations promised. Those public sector retirees have arranged their lives with those pension promises in mind. If it is impossible to meet those promises it will have a profound effect on retiree spending going forward. As real estate prices continue to fall nationwide the property tax revenues are dropping, as are sales tax receipts. In this current political environment I don't envision Congress passing legislation to bail out the states this time around. They're only hope is probably a Bernancke QEIII program whereby the Fed bacomes the 'buyer' of municipal and state debt with more phantom Bernancke bucks. That is the method by which the Euro Central Bank is propping up the weaker Euro zone countries like Portugal. The ECB has been buying 100% of Portugese debt recently to put off a collapse.
The Fed's various monetization schemes to feed liquidity into risk assets has worked thus far. But can it continue forever without triggering a Dollar crisis? We'll see I guess. But this past week the IMF renewed its call to drop the Dollar as the world's reserve currency. If that were to happen the consequences would be devestating, start with energy costs. We'd see oil prices double or triple almost overnight like we saw in the early 1970's.
Another factor to consider is the commodity price pressures beginning to form. It has already affected the rest of the world with food inflation, and it is becoming noticeable here as well.
One thing we have seen historically within intervals of input inflation and high unemplyment is margin compression. Companies have to pay more for basic materials (input) and due to high unemployment they cannot pass all the rise in input costs into the prices of their products. Thus you see margin compression and a reduction in profit margins.
The final point is one I made several days ago. The fundamental change in accounting rules for banks. Banks can value properties on their books at the price the property was originally sold for even if that property has since lost substantial value since the laon was made. This 'mark to fantasy' vs. the traditional 'mark to market' makes a huge number of banks appear profitable when they are, in reality, technically insolvent if measured by the traditional accounting standards. Moreover, they can still declare on their fantasy books that non performing loans are still making their payments. I am not making this stuff up. Every method of accounting subterfuge is being allowed to create the appearance of profitablity and stability.
Can it continue forever? Who knows, but history would suggest not.
So just when 95% of the investing public thinks we'll have markets climb indefinitely because of the "Bernancke Put" we are poised for a meaningful correction. True bull market rise choppily with backing and filling. This one has been a continuous melt up since last April. Eventually there will be some trigger that ignites the sell side sufficiently to overcome the Fed cabal's upward manipulation. This week, next month or in May. But we will eventually get a scary correction. If everything was going well in the economy and equity prices were at current levels due to real organic growth the Fed would not have to resort to the massive monetization and liquidity injection manipulation that they have been engaged in. We are in uncharted territory. Never before in history have we had a Fed blatantly involved in propping up asset prices with massive monetization. But history shows that an economy held aloat by money printing cannot be sustained. I am fairly confident that this will not be the first time it works and that, eventually, it will all end badly.
AI
