By Andy Sutton: With
the pop from the USFed’s latest attempt at financial shock and awe
already seeping from lackluster markets, and the teleprompter news
networks losing steam over their promotion of the same, it is time to
take a look back at the decisions made on 9/13/2012 and set the record
straight on some things.
QEunlimited is not going to save the US Economy.
Perhaps
one of the biggest misconceptions about all this easing is that it is
somehow going to help the economy. To stimulate it. To bring it out of
recession (yes, we’re still in recession). None of these things happened
with the first two, but there are some very good reasons it won’t
happen with the third. And the truth is there is a much more gruesome
component to this latest scam.
As
I’ve outlined many times before in these pages, what happens when the
USGovt or banks buy up toxic mortgage securities is that they’re buying
the note on your house – along with thousands of other notes since
they’ve all been bundled up. You signed on the dotted line with Bank of
America for example, but now maybe the Chinese own your house. Or the
Japanese. Or European bankers. Or the USGovt. So the fed creating
another $40 billion (that they’re willing to admit) each month to buy
more mortgages ought to be a pretty scary thing. Will they foreclose on
you if you can’t make your payments?
But
it gets better. So now we’ve got banks with an extra $40 billion a
month to play with. The notion sold to a comatose public is that this is
good because the banks will lend the money to Main Street and this will
save the economy. We’ve already shot that theory full of holes a dozen
times and I’m not doing it again. What is curious though is that the
banks aren’t going to lend the money out at all and this was never the
intent.
Instead, the intention is to use the majority of it to buy – you
guessed it – USGovt debt. That’s the agreement that has been forged.
Don’t forget that the fed works for its member banks – and regulates
them too. If you’re still not doubled over in laughter, this
group is going to monetize $40 billion a month (again at a minimum) of
government debt while patting themselves on the back and telling us how
great they are because they’re preserving our banking system, without
which we could never survive.
So we’re right back with QEU
where we were with the previous QEs. There is no intention of the
USGovt to ‘get right’ and straighten its fiscal house, regardless of
what the stuffed shirts tell you during their debates and campaign ads.
The USGovt is a junkie, and is going to be getting a minimum of a half
trillion a year in direct monetization above and beyond what its already
getting.
Once
again, the devil is in the details though. Let’s the say the USFed
simply gave the $40B/month to the banks for their junk and let them take
the money and play in the financial markets, we’d see stocks, bonds,
commodities, and so forth rise. Common people who were invested in these
markets – what few of them are left – might have a small chance of
benefitting somewhat. However, by going through the government stimulus
route, the GoverBank is ensuring that the vice that is already on many
consumers is only going to get a little tighter.
Traditional
QE has been proven ineffective at creating jobs. The few jobs that have
been ‘created’ by all the stimulus to this point have been make work,
part-time, or temporary in nature. Even the cooked government numbers
bear that out. What QE has
been effective at doing is tightening the screws on the majority of the
country through price inflation. Nothing crazy yet, but everyone is
noticing. Your elected officials know this and simply don’t care.
But
let’s get back to the idea of the USFed or some foreign bank holding
the title on your home. Many others and I have said for years now that
the whole housing boom was nothing more than a giant property grab. The
media has gone almost totally mum on foreclosures – as if the problem no
longer exists. After all, we have donkeys chasing elephants around on
stages all over the country; trying to convince you their way to ruin is
best. Given the unlimited nature of QE on a global scale, it stands to
reason that by the time this is over, the fed and the rest of the
central banks around the world will hold the title on every piece of
mortgaged real estate out there. Just as I wrote about the coup d’état
going on in Europe, the same thing is happening here.
The
progression is pretty simple. You take a mortgage with a small
community bank who then sells it to a packager who rolls it up with a
couple thousand other mortgages and in layman’s terms, it is sliced up
and sold to various economic agents. The slices throw off interest as
you make your monthly payments and so forth. Just like a traditional
bond. Well, a bunch of these slices are no good and are being purchased
by the USFed. Foreclosures are happening. Who owns the property now? You
never owned it. You were renting it first from your community bank, and
now from the USFed or whichever other entity owns your property. Some
of these properties are sold to vulture funds and you can pay them rent
to live in the house you once thought you owned. And our government
pushes this as the American Dream? And don’t kid yourself for a second;
the USGovt is quite the landlord as well, through Fannie and Freddie.
Just
keep all this in mind while you bust your tail 40 or more hours a week
if you can get them to make your mortgage payments. Your house, along
with most of the rest of the property here in the US, is owned by people
who did nothing to work for it. They simply typed a few keystrokes on a
computer, declared themselves to be rich, and bought you out. I’ve said
this many times before and apologize to those who already understand
this, however, most still don’t – or refuse to – and so we’re going to
keep hammering it until everyone gets it.
Keep Your Eyes on China
The
media would love to have everyone think that China has been knocked out
of the game because of a host of economic sins they’ve committed (which
pale in comparison to our own sins). The IMF continues to downgrade
growth forecasts for the global economy, engaging in a global game of
good cop bad cop with the mainstream media and German newest Fantasyland
resident Angela Merkel. She had the audacity, not austerity, to show up
in Greece and assure the Greeks that the worst of the financial crisis
was over. On Thursday, Greece lost its biggest company. Obviously not
everyone believes Mrs. Merkel and her band of ECB/IMF cronies.
Let’s
get back to China though. Conventional logic says China is dead because
aggregate demand is slowing due to a global recession. Not to mention, the Chinese have allowed a real estate bubble,
that makes America’s look like child’s play in comparison, blow up over
the past several years. China’s ongoing business and economic model has
been based on the continued expansion of consumption by the West,
especially America and the Eurozone. However, unlike every other
international ‘superpower’, the Chinese actually have a war chest – and
it is filled to the gills with actual capital – not just phony printed
currency like the war chest our government claims to have. Basically,
China is in a position similar to where America was during Depression
1.0 with regards to the cookie jar of savings.
However,
and as other analysts have already pointed out, the progression through
turmoil always seems to be recession, depression, currency wars, trade
wars, followed by world wars. Currently, we’re at stage 4 and waiting on
the world war and nobody is rattling sabers as loudly as the Chinese.
Consider the recent comments of Chinese President Hu Jintao:
“The
navy should “accelerate its transformation and modernization in a
sturdy way, and make extended preparations for military combat in order
to make greater contributions to safeguard national security,” he said.
Addressing
the powerful Central Military Commission, Hu said: “Our work must
closely encircle the main theme of national defense and military
building.”
China’s main dispute with Japan over the Diaoyu Islands has already sent shockwaves and panic buying as Chinese citizens load up on supplies, particularly salt.
Despite
this, the Chinese are still an active global player, particularly in
the Middle East, which is one of the major outposts they’ve sought to
exert influence. At risk are precious oil supplies, and the stakes are
growing by the day. Wars have flared up in a half-dozen nations already,
stoked by the CIA-funded, America-backed
al-Qaeda terror group. The Orwellian switching of the enemy cannot be
ignored in this case. The destabilization of the Middle East is on, and
countries like China and Russia have serious vested interests and
investment in that region. They will not go quietly, that is assured.
The election of Hugo Chavez to another 6-year term ensures that even
more oil will be flowing eastward, making the Middle East even more
critical.
China has already threatened to exercise its nuclear options with regards to bonds
– on Japan of all nations, even ahead of the US. However, such an
action would have an immediate and devastating effect on our bond
markets since the Japanese hold so much USGovt debt. Think of a game of
dominoes. Obviously a threat against Japan is a threat against America
and the Chinese can stop the bond game any time they feel like it. As
for America’s recourse? War? That’s about it. Tariffs? Good luck. How do
you think Wal-Mart, etc. would look with all the ‘Made in China’ items
gone? Sure, such a move would hurt China, but it would hurt the rest of
the world an awful lot more. China has the wiggle room, the flexibility,
and the leverage. We don’t. If you think its bad that the USFed or
perhaps a Chinese bank holds the title on your house, think of the
consequences of a geopolitical slip-up. We’ve been promised these times
would be interesting, and in that regard we’re certainly getting our
money’s worth.
Depression 2.0 – A Slow But Steady Progression
The
soft depression continues in America under the watchful eye of people
like Ben Bernanke, Jamie Dimon, and Mario Draghi. The social net, while
still holding up reasonably well, is showing obvious signs of strain as
more and more Americans either give up and fall into the clutches of
dependency, or just decide sloth is the best policy and go on the
government dole. After all, why should anyone take one of these ‘new and
improved’ make work, temp, or part-time jobs when the government will
pay for food, housing, medical care, schooling, heat, and even provide a
free cell phone for doing absolutely nothing? America is rotting from
the inside morally, just from the entitlement perspective.
I
get constant emails accusing me of being a gloom and doomer and the
common point made is ‘If this is a depression, then where are the
breadlines?’ Simple. Food stamps. They didn’t have SNAP back in the
1930s, so people stood and waited in breadlines. Today, they get a debit
card so they can go to the store and shop like everyone else. The only
time anyone knows the difference is when the person checks out and that
is only if someone notices that it is an EBT card. There don’t need to
be breadlines on the street; we’ve got them in our stores. 100+ weeks of
unemployment compensation? We certainly didn’t have that back in the
1930s either. Back then you lost your job and two months later you were
homeless unless you had savings. We didn’t have credit cards to fall
back on either. I would be willing to bet that a significant portion of
the 5 million new iPhones that were sold the first weekend were bought
by people who are on some type (or multiple types) of government
assistance. How many others went into further debt to get one? Yet the
USMedia will sit there and make the ridiculous assertion that the iPhone is going to save the USEconomy. This is level of ignorance that exists regarding the state of our world today.
ZIRP
has another consequence and this ties into what was mentioned above
with regards to the USFed holding the title on your mortgage. With home
equity loan interest rates so low, many people who had previously
‘clear’ properties have raced back out and borrowed to remodel or
whatever, putting them back on the chopping block. I’ll say this again
for emphasis. By the time this
monetization action is finished, the USFed will hold the title on every
piece of mortgaged property in the United States. There is an
excellent chance it’ll hold most (if not all) of the USGovt debt that
isn’t already held by other entities like China, Japan, OPEC nations,
either on its own or through its member banks. Again, what this means is
that you’ll scrimp to pay your mortgage and your taxes, which will go
directly to a group of banks that created your debt from nothing. Avoid
debt like the plague no matter how attractive the ‘terms’ appear to be.
For once we can learn from the mistakes of others.
We
view sanitized news from Europe, almost completely unaware that we’re
next. We’re one headline away. It is as simple as that. So perhaps these
things should be kept in mind before turning on the latest edition of
the political circuses, donning your donkey or elephant hat and
declaring that your guy kicked the other guy’s tail. It really goes an
awful lot deeper than that. We Americans have often been accused by our
neighbors around the world of being a mile wide and an inch deep. I for
one think it is about time we stopped proving them right.
Andrew W. Sutton, MBA
Chief Market Strategist
Sutton & AssociatesSource
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