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Monday, July 21, 2014

Why It Is A Hollow Bull

As stated, the Rant accepts all comments and suggestions in an effort to provide a better product. Today's theme was suggested by a reader who needed more clarification on problems in the stock market.--Mike
 
Why It Is A Hollow Bull
When insiders prepare for the trading day, part of the ritual is to touch the nose of the bull statue for luck. These days the market relies less on luck than on insider manipulation.
 
Part of the manipulation has been through altering the fundamentals. The Wall Street insiders do not care how shaky the fundamentals are to support the current levels as long as those prices continue to go up, hence the touching of the bull rather than the bear.
 
But increasingly, some of the more notable insiders, are beginning to sound alarm bells the Rant began ringing five years ago about the state of the market. (Which means the Rant was too far in front of the curve to be an effective tool for investors.) However, it also means the lack of fundamentals are finally catching up with the unsupportable climb the bull run has managed.
 
The founder of Grant's Interest Rate Observer, Jim Grant, believes the rise in the market is not due to trading of shares but is a result of Federal Reserve operations. "The Fed is constitutionally behind the curve and no doubt will remain so. It is in the business of reacting to things rather than acting on things. After years in which money has been cheap and freer than free there is going to be a problem, we just don't know where it is coming from."
 
Grant based his observations on the fact the Fed did not see the 2008 meltdown coming but has admitted to "taking unique steps to try and fix the Great Recession." His market premise is if the problem wasn't foreseen then why should now be any different?
 
CNBC's Jim Cramer of "Mad Money" reported one item of importance for his viewers to do this week, "Stay away from the market." Why he gave this piece of advice was simple. "There's too many uncertainties right now. There is no support for the market at these levels," Cramer said.
 
One odd factor Cramer cited was the disconnect between the market condition and that on Main Street. Where the market used to reflect the general state of the economy, now it is a negative of the real economic picture.
 
Jim Paulsen of Wells Capital Management cautiously likened the market to a Hollywood starlet. "The market cannot handle Main Street success. The one constant in this rally has been the disconnect between the markets and Main Street. A perpetual wall of worry in the financial sector has been the foundation of this market. As soon as we feel that Main Street is getting better and seeks investment funding from the banks, it would not be unrealistic to think Wall Street will run into trouble--just like a starlet with too much early success." 
 
It has been said the bell tolls loudest for those who ring it. If Cramer, Grant and Paulsen are right in their assessments, the Fed's own James Bullard, President of the St. Louis Federal Reserve, has heard the hollow reverberations clearest.
 
Despite assurances from Chairman Janet Yellen to Congress, Bullard sees inflation threatening the economy again. "Inflation, core inflation, seems to be rising up once again," Bullard said in a speech in Owensboro, Kentucky. He added he has been surprised by how low inflation has been for much of the past year.
 
Bullard predicted an interest rate hike coming early in 2015. An interest rate hike will have a devastating inflationary effect on not only the economy but the financial well-being of the U.S. dollar. With a rate hike, Grant's gloomy report takes on more significance. When banks were able to make money on both ends by borrowing from the Fed and negating any and all increases in inflation at zero interest rates but invest the same cash hoard into a recently-degraded market and reap the windfall of a climbing asset value, the financial sector appeared to be healthy.
 
Appearances can deceive. The banking sector is also the world's biggest gambler. You would have thought the bankers would have learned their lesson in the housing meltdown but they didn't. Where the Toxic Asset Relief Program had to bail out just over $650 billion in bad debt while Fannie and Freddie absorbed another $1.8 trillion off the books, the bankers are currently holding in excess of $30 trillion in unregulated default credit swaps.
 
That means the financial sector has raised every dollar on the table in 2007 by a factor of twelve in the intervening years. A swap is akin to an insurance policy. If there are a tremendous amount of claims against the insurance policy, the insurer cannot pay. This is what happened in 2007's liquidation of Lehman Brothers.
 
Then the government acted, stepped in and stopped the freefall. But the market was seeking a lower level than it managed and still wants to get there so it can align the fundamentals which have been disregarded by the financial gurus themselves.
 
The recent food price spike sent consumer confidence down. That means Main Street isn't quite ready for a recovery or even the stirrings of a recovery, so the market will probably continue its bull run. But if consumers ever start feeling good about their financial state again, Main Street will begin to show health and that could crush the markets' rise. It is a conundrum the tinkerers haven't unknotted.
 
The politicians will try to keep the market on positive ground but the lack of a fundamental base and the Federal Reserve's unprecedented printing run will negate any and all probable positive spins when that sag occurs.
 
Not even a full-body rubdown of the bull will suffice to keep the bear at bay. Without the support of the markets' rise, what does the 'recovery' look like then?
 
Washington can dance out all the fancy statistics it wants, the Fed can try another press run, it won't matter. Average Americans got their wealth trimmed an estimated 20% in the recession, this time around it could be much worse because of the increased bets placed by the financial sector. Somebody has to cover those bets. The Rant's projections could be wrong, but are you going to lump insiders like Grant, Paulsen, Cramer and Bullard into the same category as easily?
 
The financial day of reckoning is approaching. On that day, events will happen too fast for people to react, even insiders. Many that are riding the wave will become Lehmans if not outright lemmings.
 
"I have sworn on the altar of God eternal hostility to every form of tyranny over the mind of man."--Thomas Jefferson 

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