After Five Years of The Fed’s Forced Zero Interest Rate Policy, Economy Skids Dangerously Close To Contraction, And Enormous Malinvestment Now Threatens An Era of Market Manias, Panics And Crashes

Five years of the Fed and Treasury Department’s forced Zero Interest Rate Policy (ZIRP) have badly distorted our economy, removing any pretense of a “free market.” All that we have left are markets on life support. With yields of less than 1/4 of 1%, passbook savings accounts are joke. Money market rates ranging from 0.40% to 0.85% aren’t much better. With ZIRP, local, state, and Federal government over-spending has had no serious consequences. But when rates eventually do spike, there will be a bloodbath.Bond yields are completely out of whack. Banks have been given unrealistically high reserves. So ZIRP is also a bailout in disguise that is keeping insolvent banks floating, long after they should have failed. Worst of all, ZIRP has created negative rates of return, after adjusting for inflation. This discourages genuinesavings and investing. Out of desperation, savers and investors now plunge their money into the stock market, hedge funds, mutual funds, junk bonds, and derivatives, which have become enormous casinos with wild price gyrations. This enormous malinvestment now threatens an era of market manias, panics and crashes. With a stagnant economy, there is no end in sight for ZIRP. It will likely continue to 2014 and beyond. In the long run we will all suffer for it. So we must ask: Cui bono? It clearly isn’t you and me that benefits. It is the government and the banksters.

Economy skids dangerously close to contraction

Commentary: Spending weakening, but incomes still growing

First Take: Consumers are growing more cautious, which could trip up the recovery, says Rex Nutting.

U.S. economic growth slowed sharply again in the second quarter, skidding dangerously close to an outright contraction in gross domestic product.

Following release on Monday of tepid reports onretail sales and inventory accumulation, forecasters marked down their GDP expectations from 1.4% to 1.1%. It’s probable thatU.S. GDP rose less than 2% for the third quarter in a row and it’s possible that growth was less than 1% for the second quarter in the last three.

It’s not news that the global growth is sluggish, and that sluggishness is weighing on U.S. manufacturers’ export growth. And we know that the federal government is cutting back its spending.

Big Miss in Retail Sales vs. Expectations; Trend Change or Another “Soft Patch”?

Retail sales were up 0.4% in June compared to Bloomberg estimates of +0.8%. May retail sales were revised lower, to +0.5% from an originally reported +0.6%.

The increase seems healthy enough until you dive into the details. Here are some retail sales comments from Bloomberg to help put things into perspective.

  • Restaurants and bars decreased 1.2 percent in June, the most since February 2008.
  • Sales dropped 2.2 percent at building materials outlets, the most since May 2012.
  • Purchases at department stores declined 1 percent in June.
  • Retail sales excluding autos and gasoline unexpectedly fell 0.1 percent.
  • Purchases rose 2.4 percent at furniture and home furnishing chains, the most since May 2012.
  • Automobile dealer sales rose 1.8 percent
  • Purchases excluding autos, gasoline and building materials, which render the figures used to calculate gross domestic product, rose 0.1 percent after a 0.2 percent increase in the previous month.

That last bullet point explains why the next GDP number will likely be below stall speed.

Yet economists still predict the US economy will expand at 2.3% in the third quarter. I will take the under (not that there is much meaning to GDP numbers in the first place).


Moving Average Monday…Junk Bonds break below key lines!


Junk Bonds ETF’s JNK & HYG both broke below their 50 & 200 EMA lines back in May and declined around 7% from high to lows. They are often considered leaders of the stock market. Could it be important for them to climb back above these key moving averages?  You bet!

The Power of the Pattern reflected in the chart below that SPY was on support in this 6/25 post. (see post here)  Both of them have experienced rallies of late off the late June 25th lows, SPY up 5.5% and JNK up 2.45%….a case could be made over the past two weeks that SPY is leading junk!

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SPY & JNK have rallied off this support, with the Junk rally only about half the gains of SPY.

With junk bond yields breaking above the bullish falling wedge (top chart) it is important for junk bonds that they keep moving higher and move above these important moving averages, they are now below!

The Housing Bubble Goes Mainstream

While it isn’t news to regular readers, the fact that one of the key pillars of the “housing recovery” (the other three being foreign oligarchs parking cash in the US courtesy of an Anti Money Laundering regulation-exempt NARforeclosure stuffing and, of course, the Fed’s $40 billion in monthly MBS purchases) have been the very biggest Wall Street firms (many of whom had to be bailed out the last time the housing bubble burst) who have also become the biggest institutional landlords “using other people’s very cheap money” to buy up tens of thousands of properties, appears to still be lost on the larger population.

Intuitively this is to be expected: in a world in which the restoration of confidence that a New Normal, in which everything is centrally-planned, is somehow comparable to life as it used to be before Bernanke, is critical to Ben’s (and the administration’s) reflationary succession planning. As such perpetuating the myth of a housing recovery has been absolutely essential. Which is why we were surprised to see an article in the very much mainstream, and pro-administration policies NYT, exposing just this facet of the new housing bubble, reflated by those with access to cheap credit, and which has seen the vast majority of the population completely locked out.

Fitch Downgrades European Financial Stability Facility to ‘AA+’

Why Five Asset Classes Got Slammed When Treasury Rates Spiked

This One Chart Shows You How Crazy The Current Rally In Small Cap Stocks Has Gotten

Check out the Russell 2000 versus its 200-day moving average below.


RTYMiller Tabak, Business Insider, Bloomberg

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The markets will oscillate between euphoria and despair…

Having reflecting on the global situation, it seems to me that there are two or perhaps three regime shifts occurring. Markets don’t handle single regimes shifts well and there will be volatility, but multiple regime shifts is going to mean uber-volatility.My inner trader wants to dial down the risk in his portfolio as the moves could be treacherous. We will see rip-your-face-off rallies (for anyone caught short) and bayonet-the-wounded downdrafts (for anyone with long positions).

U.S.: Tapering = Rising risk premiums

Let me explain by going through the Big Three global regions one at a time: the U.S., Europe and China. In the US, the Fed indicated on May 22 that it is considering a plan to taper off its QE purchases. In other words, it may be taking its foot off the accelerator but it is not about to stomp on the brakes (raise rates).

The more subtle message that the market still hasn’t gotten is that…

Fade the rallies, accumulate the sell-offs
In conclusion, we are in the vortex of several storms and volatility will be high. Expect that the markets will oscillate between euphoria and despair in the space of a few days.My inner investor, who has a long-term plan, is going to relax, go on holiday and ignore the volatility. My inner trader is lightening up positions and keeping his powder dry. He is hoping to fade the rallies and accumulate the sell-offs in order to clip a few pennies here and there.

The 6 Stages of Bull Markets — and Where We Are Right NowRead more:

Global GDP Cycles, Or Another Seven Years Of Bad Economic Luck




Chart: h/t Sean Corrigan of Diapason Commodities

The Next Financial Crisis Will Come With A Crisis Of Faith

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