Not According to Plan
Larry Levin

Ho Chi Minh City, Vietnam

#1 Dec 14, 2011
The market fell again Tuesday and although three down days in four is nothing for central banksters to truly worry about (and there is plenty of lower support in the S&P)– it nevertheless is not going according to plan. The Fed’s QE1 plan did work – it saved the markets from total annihilation. However QE2, QE Lite, ZIRP, the Twist, secret loans, unlimited swap lines, etc has done little if anything. Moreover, the market is right back to where it was when the Fed announced its latest bid-rigging scheme with multiple other central banking mafia heads in tow.

In the meantime, yesterday’s Financial Times told us that the industrialized nations will borrow $10 trillion this year. Next year, the figure should be higher.

We are, as all Dear Readers know, in a Great Correction. And in a great correction asset prices fall…along with a general fall-off in employment, consumer spending, investment, GDP growth and all the other things that make a robust economy. Demand drops…which typically causes prices to fall (or at least not to rise as quickly as before). There is less demand for credit as for everything else. So, the pool of available bonds falls…forcing up bond prices and forcing down bond yields.
wouldn’t be too surprising if all this demand for credit pushed up bond yields.

And here we find ourselves with a grim, but philosophically amusing, insight. Typically, every cloud has a silver lining. Every glass that is half empty is also half full. And dawn follows even the darkest night. That’s just the way the world works. But what if the cloud has no lining, neither of silver nor of anything else that reflects light? And what if the glass is completely empty?

In the normal economic world, low interest rates are the half-full part of the correction glass. A correction comes. Asset prices go down…along with all the other things mentioned above. But interest rates go down too…which make it easier for new projects to clear the “hurdle rate.” At 6% interest, for example, a new project has to return at least 6% to breakeven. Any new investment that won’t produce more than a 6% minimum gain is quickly abandoned. But as the correction drives down yields, to say 3%, all of a sudden a lot more investments begin to make sense. Dawn comes.

Both booms and busts are, normally, self-correcting.

But leave it to the feds to stop the sunrise. This huge demand for credit from the industrialized governments could drive up interest rates. Imagine what that will do. Already in a slump, households, businesses and investors could find their borrowing costs going up, not down. They could find prices rising, too, especially the prices of energy and food. What a world…a major slump, but with rising prices and rising interest rates!

And then, consider what happens next. The feds will err again. They will feel obliged to finance government borrowing themselves. Here’s the Bank of International Settlements, giving us the heads up:
The Bank for International Settlements Sunday issued an oblique endorsement of coordinated action by the world’s largest central banks to ease funding conditions for banks.“A freezing of interbank markets in major funding currencies, as during the recent crisis, may require the ability to supply official liquidity in major currencies in an elastic manner,” the BIS wrote in its regular quarterly report.”— MarketWatch
It was only a week ago that 6 major central banks announced a coordinated rate cut — juice up the markets. And now all major central banks seem ready and willing to sacrifice the integrity of their currencies in order to protect their bond speculators.
This is what we expected all along. But we didn’t expect it so soon. It causes us to revisit our “long, dark road to Tokyo” forecast. You remember our prediction: the US has already followed Japan through one “lost decade.” We figured it would lose another one as the Great Correction drags on.

Larry Levin
Founder & President- Trading Advantage

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