Kicking heroin is hard but necessary. Lynyrd Skynyrd explains why below.
Kicking the metaphorical Mr. Brownstone of QE is also necessary for the United States to ever redevelop the economic power that we once enjoyed. Fed Chairman Ben Bernanke may be pitching his last inning, but he said the right thing when he announced that The Fed would taper the rate at which it shelled out QE. As you can read below, that will be hard. Here’s what Mr. Bernanke got as a reward for speaking the truth to a gaggle of easy money addicts yesterday.
STOCKS GETTING SLAMMED — INTEREST RATES SPIKING — COMMODITIES CRUSHED — GOLD AND SILVER TANKING, The LIBOR Of China Is Going Totally Ballistic, Market Bloodbath In Brazil, and you’d better have a GOOD Plan ready, because Night Wolf is Eating The Moon Virgin! Now I can’t quite verify that last one, but it’s not a good day to check in and take a peek at the Ye Olde Mutual Funds.
So what makes Night Wolf’s tummy rumble? Let’s gaze at the total and utter glory. It’s a bit like watching NASCAR for the wrecks. You see It's A Commodity Massacre, Too. Gold is off over 5%, Silver is off over 6% and Texas Tea is about 2.5% cheaper by the bag.
But hey! We can always hedge this with some reliable, trustworthy government bonds. Oh, wait… With the exception of Germany, any foreign country worth buying a bond from is getting routed. Every 10Yr benchmark went up at least 10 bps.
The silver lining, if any, is that The United States is not the biggest smack-addict out there. European countries depend far more heavily on government subsidies. Their hangover from the US turning off the spigots is worse even than ours. And China? China makes me want to channel Jim Mora.
But according to Paul Krugman, Brad DeLong and Thomas L. Friedman, China was set to take over. They had the guts to do the stimulus that E-Vil, Conservative Republicans prevented us from unleashing. The future was theirs for the taking. What was that Coach Mora? Playoffs? Charlene Chu of Fitch is slightly more detailed than was Jim Mora below.
"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing. "There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signaling," she told The Daily Telegraph.
So the Interbank Loan Overnight Rate, (what we refer to as the LIBOR) just went exponential moon-shot on them. Banks in China now lend money to one-another at 13.4%. So about that payday loan you wanted?
What does all of that really mean? That these people are all lining up for their heroin, and neither The US Fed or The Chinese central bank are in any mood to hand it out as generously as they used to. The predictable withdrawal symptoms kick in. The markets throw a temper-tantrum and attempt to scare Ben Bernanke et al into opening up the stash again.
I don’t personally fear this much. My two-year old girl does the same thing when Mommy drives away to visit the local grocery store. If the people in charge of the money stash convince the addicts that “No” = “No”, then we can wind this whole ridiculous government price support of investment markets down and start actually discovering what things are really worth.
The discovering of what things are really worth is not a pleasant process, per se. J. Kyle Bass once described this as a Darwinian Flush. But he also saw the necessity for the clearing of the wreckage and pointed out we would come out stronger on the back side. Yet we never took the high-colonic. We (and to a much greater extent China), are still constipated with bad investment decisions that have been propped-up by immoral government largesse.
Now Bernanke has pretty much run out of ammo to keep this farce in progress. The necessary consolidation and die-off can occur. Today’s carnage should be stoically accepted instead of feared. As Earnest Hemmingway famously quoted King Solomon; the sun also rises.