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“Dangerous Divergences” Lie aheadGary Dorsch “I guess, I should warn you. If I turn out to be particularly clear, you’ve probably mis-understood what I’ve said,” former Federal Reserve chief Alan Greenspan was fond of saying, when he controlled the Fed’s money spigots. For many Fed watchers, it was a great relief when “Easy” Al finally retired from the Fed, since there is nothing more vexing - than correctly interpreting Green-speak. “Everything depends upon proper listening. Of ten individuals who listen to the same speech or story, each person may well understand it differently, - perhaps only one of them will understand it correctly,” an eighteenth century theologian observed. So it was of great interest, while listening to a March 27th interview on Bloomberg TV, with the maestro, - Mr Greenspan, who is settling into the twilight years of his life-time. This time, Greenspan spoke more clearly, about such arcane subjects such as “Asset Targeting,” and the manipulation of markets. When asked about his outlook for the US-economy, Greenspan answered by saying everything depends upon the ability of the monetary authorities to influence the direction of the stock market, “Ordinarily, we think of the economy affecting stock prices. I think we miss a very crucial connection here in that this whole economic recovery, as best as I can judge, is to a very large extent, the consequence of the market’s bottoming last March, and coming all the way back-up. It is affecting the whole structure of the economy, as well as creating the usual wealth effect impact,” Greenspan said. Thus, what Mr Greenspan is describing, is the contours of the monetary policy that he pursued as Fed chief – utilizing the Dow Jones Industrials index as a key instrument of national economic policy. By “actively managing” the direction of stock index futures contracts, the Fed could impact the wealth of tens of millions of US households, and by extension, influence consumer confidence and spending. Greenspan generally pursued an “asymmetric” monetary policy, - in other words, - always quick to slash interest rates and flood the markets with liquidity whenever the stock market was tumbling, but was very slow in draining liquidity or raising interest rates, when stock markets were booming. There was always an inherent bias towards asset bubble inflation, under the Greenspan Fed’s policies.
For big-time risk takers in the US stock markets, speculators could usually rely on the safety net of the “Greenspan put,” - or a quick easing of monetary policy, to cushion the market from steep losses, when risky bets turned sour. Under the tenure of the Fed chief Ben “Bubbles” Bernanke, speculators have enjoyed the easiest monetary policy in history, which also earned Mr Bernanke the designation of Time magazine’s “Man of the Year,” for running the printing press at lightning speeds. According to Greenspan, the aggregate value of stock markets worldwide has rebounded by $15-trillion, from their lowest point a year ago, with the US-stock markets recouping $5.4-trillion of lost wealth. “We’re going to get a significant rise in employment,” he predicted. But as the long-term unemployed re-enter the job market seeking work, the 9.7% jobless rate would stay little changed, he said. In the United States, the Fed’s central mechanism for inflating the stock market and fueling a powerful stock market rally, has been the radical shift towards “quantitative easing” (QE), in which the Fed printed $1.75-trillion of high powered money, - and channeled the cash into the coffers of the Oligarchic banks on Wall Street, which in turn, bid-up the prices of high-grade corporate and junk bonds, thus narrowing their yield spreads with US-Treasuries. “Remember, it is the market value of equity in a financial institution that determines the ratings of its debt. It’s not the book value. As the stock prices have gone up, debt became far more valuable and you can see this blossoming of finance, - the huge issuance especially of junk bonds,” Greenspan added. Thanks to the booming stock market, there were $311-billion of new stock offerings on Wall Street, including IPO’s, and secondary offerings, in the second half of 2009. Junk bond sales worldwide reached a record $38.3-billion in March 2010, as rising profits and ultra-low interest rates, attracted swarms of yield hungry buyers, who are fed-up with zero rates of return on CD’s and money market funds.
There is great optimism on Wall Street that a virtuous cycle is now beginning, in which S&P-500 companies would start to re-hire workers again. US companies have slashed 8.2-million jobs over the past 27-months, while utilizing the vast oversupply of unemployed workers, to slash wages and medical benefits. Thus, corporate profits jumped $109-billion in the fourth quarter to $1.47-trillion, up 31% from a year ago, as companies benefitted from reduced labor expense. S&P-500 companies bolstered their cash balances to $1.2-trillion, to weather any downturn in the economy. However, much of the new hiring over the next several months would be for temporary workers by the US Census Bureau, which hired 181,000 workers in the January to March period, and plans hires for 697,000-jobs for the April-to-June period. According to some estimates, about 150,000-jobs have to be created every month, in order to keep up with population growth. Although the US economy gained 162,000-jobs in March, the most in three years,a vast portion of American society is either unemployed or underemployed. About 15-million people are without jobs and another 9.1-million are working part-time, because full-time work is not available. Thus, the main engine of growth for American company growth profits derives from the “exploitation of labor,” with US-workers, on average, producing 7% more than a year ago, for 6% less wages.
At this critical juncture, with the Dow Jones Industrials index bumping against the psychological 11,000-level, Greenspan was asked about his views for the longevity of the stock market’s rally. Greenspan sees the market flattening out in the months ahead, but what spooks him, is the slumping Treasury bond market, which has been trending lower for the past 15-months. Yields on the benchmark 10-year note, are climbing dangerously higher, towards the key resistance level of 4-percent. “It is a canary in the mine at this stage,” Greenspan warned. “The way I look at it, if the markets are working well, the short term outlook is one of increasing momentum. You can see it developing,” he said. “But if the 10-year note and the 30-year bond yields begin to move-up, in other words, if the ten-year note begins to move aggressively above 4-percent that is a signal that we are in some difficulty. There is basically this huge overhang of federal debt which we have never seen before. It is going to have a marked impact eventually unless it is contained, on long-term rates. That will make a housing recovery very difficult to implement and put a dampening on capital investment as well,” Greenspan added. Greenspan is spooked by the “dangerous divergence” that is developing between a high and rising S&P-500 stock index and the simultaneous slide in the Treasury bond market. They are moving dangerously in opposite directions. And at some point in the future, if the Treasury bond market continues to tumble sharply lower, - lifting yields sharply higher, - either under the weight of massive new supplies, or Chinese dumping of T-bonds, ahead of a probable revaluation of the yuan against the US-dollar, the divergence between the asset classes would grow even wider, to the breaking point – that triggers a stock market crash of unknown magnitude. Amongst the delirious stock market bulls, there’s an unshakeable faith in the magical powers of the “Plunge Protection Team,” (PPT), convinced that the Fed and Treasury can deftly prevent the yield on the key benchmark 10-year T-Note from spiraling above 4-percent, not matter how much supply hits the debt market. For now, the Fed is trying to put a safety-net under the T-bond market, by promising to keep the fed funds rate pegged near zero-percent for an “extended period of time,” hoping to attract yield starved investors to the long-end of the curve. “The economy continues to require the support of accommodative monetary policies,” Bernanke told lawmakers on March 25th. "If it were positive to take interest rates into negative territory I would be voting for that,” said the radical inflationist, San Francisco Fed chief Janet Yellen on Feb 22nd. Yet the Fed is winding down its year-long, $1.75-trillion monetization scheme this week, which could make it difficult for Washington to finance its massive budget deficit in the months ahead. To read the entire article, click on the hyperlink below: http://sirchartsalot.com/article.php?id=129 ### Gary Dorsch 321gold Ltd |
