Prelude to a Crash...

That's about the way I see the situation too, worth reading and maybe take some precautions...

Mike Whitney: Prelude to a Crash

"The bubble in Emerging Markets has burst sending foreign currencies plunging and triggering a sharp reversal in capital flows. The hot money that flooded the EMs,–(which lowered the cost of borrowing for businesses and consumers)–is entirely attributable to the Fed’s policy. QE pushes down long-term interest rates forcing investors to search for higher yield in other markets. Thus, the cost of money drops in EMs creating a boom that abruptly ends when the policy changes (as it has).

Capital is fleeing EMs at an unprecedented pace precipitating a dramatic slowdown in economic activity, higher consumer prices and widespread public distress. The Fed is 100% responsible for the turmoil in emerging markets, a fact which even mainstream news outlets blandly admit. Here’s an excerpt from an article in Bloomberg just this week:

“Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record…More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show…

Emerging economies have benefited from cheap money as three rounds of Fed bond buying pushed capital into their borders in search of higher returns…

The Fed’s asset purchases had helped fuel a credit boom in developing nations from Turkey to Brazil. Accumulated capital inflows to developing-country’s debt markets since 2008 reached $1.1 trillion, or $470 billion more than their long-term trend, according to a study by the International Monetary Fund in October.” (“Record Cash Leaves Emerging Market ETFs on Lira Drop“, Bloomberg)

The Fed doesn’t care if other countries are hurt by its policies. What the Fed worries about is how the taper is going to effect Wall Street. If the slightest reduction in asset purchases causes this much turbulence abroad, then what’s it going to do to US stock and bond markets?

The answer, of course, is that stocks are going to fall…hard. It can’t be avoided. And while the amount of margin debt is not a reliable tool for calling a top; it’s safe to say that the recent spike in investor leverage has moved the arrow well into the red zone. Investors are going to cash out long before the Fed ends QE altogether, which means the selloff could persist for some time to come much like after the dot.com bubble popped and stocks drifted lower for a full year. Now check out this clip from Alhambra Investment Partners newsletter titled “The Year of Leverage”:

“For the year, total margin debt usage jumped by an almost incomprehensible $123 billion, while cash balances declined by $19 billion. That $142 billion leveraged bet on stocks far surpasses any twelve month period in history. The only times that were even close to as leveraged were the year leading up to June 2007 (-$89 billion) and the twelve months preceding February and March 2000 (-$77 billion). Both of those marked significant tops in the market.” ( Alhambra Investment Partners newsletter titled “The Year of Leverage“)

Repeat: “The $142 billion leveraged bet on stocks far surpasses any twelve month period in history.”

Investors are “all-in” because they think that the Fed has their back. They think that Bernanke (or Yellen) will not allow stocks to fall too far without intervening. (This is called the “Bernanke Put”) So far, that’s been a winning strategy, but that might be changing. The Fed’s determination to taper suggests that it wants to withdraw its stimulus to avoid being blamed for the bursting bubble. (“Plausible deniability”?) That’s what’s driving the current policy. Here’s more on margin debt from Wolf Richter at Testosterone Pit:

“On the New York Stock Exchange, margin credit has been hitting new records for months. All three mega-crashes in my investing lifetime have been accompanied by record-setting peaks in margin debt. In September 1987, a month before the crash, margin credit peaked at 0.88% of GDP. In March 2000, when the crash began, margin credit peaked at 2.7% of GDP. In July 2007, three months before the downdraft started, margin credit peaked at 2.6% of GDP. Now, margin credit has already reached 2.5% of GDP.” (“Plagued By Indigestion, Fed Issues Asset-Bubble Warning”, Testosterone Pit)

Stock market crashes are always connected to massive leverage, loosey-goosey monetary policy and irrational exuberance (“excessive risk taking”), the toxic combo that presently rules the markets. The Federal Reserve is invariably the source of all bubblemaking and financial instability.

As we noted earlier, equity repurchases or stock buybacks are another sign of froth. Here’s an excellent summary on the topic by Alhambra Investment Partners:

“In the third quarter of 2013, share repurchases totaled $128.2 billion, the highest level since Q4 2007. For the twelve months ended in September 2013, aggregate share repurchases were an astounding $445.3 billion; the only twelve-month period greater than that total was the calendar year of 2007 and its $589 billion.

The common argument advanced in favor of such share repurchases is that companies are using cash to recognize undervalued stocks, but that is total hogwash…

…corporate managers are no different than the reviled stereotypical retail investor. Both leverage themselves further and further as the market goes higher, not in recognizing undervalued stocks or companies but in full froth of chasing obscene values via rationalizations.” ( Alhambra Investment Partners newsletter titled “The Year of Leverage”)"

 

Wow, 100% is a big number. That doesn't leave room for even 1% of responsibility being on these corporations borrowing this money.

 

I am not responsible for the writing style of the author, but the information he provides is good and reflects the actual situation, he, like anybody else, of course, does not know how it will develop, let's wait and see...

 

Maybe the country just returns to what it would have been without having a bunch of cheap money coming in.

I don't see how anyone makes money in this town. There is nothing I pay for which makes anyone much money. The people who serve me get paid crap. The services I pay for are crazy cheap. Even my rent would only pay for one week of my grocery bill. Sure, there are a handful of people getting rich from what I dish out, but that's like the 1% back home.

 

Its all due to the overpopulation problem Dude, theres just too many people for a limited number of jobs there.

 

What I will write now should be in another thread with a new title but I believe more and more that Dumaguete City (The City of many Banks and more Pawnshops), is in fact a HUGE money laundering place, consider this few facts, Dumaguete is connected to the BIG Digital Backbone that runs trough the Philippines by a large Fiber Optic Cable, despite this, Internet sucks for private households, the "Call Centers" are many, some of them are hidden away, like the one at Hyper Market. Then you have this HUGE number of Banks of any shade, but no businesses to do business with, the large Robinsons has it's own bank, many questions but no answers, I guess thats life...

 

There are three new gas stations opening every day for them to do business with, and motorcycle dealers on every corner. Not to mention a new hotel opens about once a month.



Dumaguete is growing at a faster rate every year. You and I have been here long enough to witness the growth. 15 years ago there were half as many people as there is now, and there was not enough infrastructure to support the number of people then. Infrastructure has improved dramatically, but still has not kept up with the growth.

Larry

 

If one has time and is inclined enough to do it, I would suggest to make a count of all the Banks and Pawn Shops on City proper...

Here some other thing worth learning about...

"Benn Steil’s recent book, The Battle of Bretton Woods, sets the stage. As Steil explains, Harry Dexter White, the US policy architect at the Bretton Woods conference of 1944, wanted a new international monetary system to end competitive currency devaluations and trade protectionism – the twin scourges of the 1930s, from the US perspective.

Reflecting the times, the New Deal Treasury also wanted to: eliminate the old European powers as rivals on the world stage, in part by breaking Britain’s imperial trade preference; elevate the US dollar to the status of surrogate gold; and shift the focus of power for the United States’ monetary system from Wall Street and the Federal Reserve Bank of New York to Washington and the Treasury Department. John Maynard Keynes, White’s British counterpart, wanted a new monetary system that would support liberalised trade while keeping global payment imbalances from emerging – and if they did emerge, allow them to be corrected with minimal economic pain.

The core difference in perspective reflected differing national circumstances. The United States, a country with massive reserves and a big trade surplus, was not concerned with global imbalances in 1944. Britain, deeply in debt, with few reserves and uncertain export prospects, wanted the new monetary system to create a type of international central bank to encourage the growth of money globally, with mechanisms to press surplus countries to increase imports or appreciate their currencies."

 

An incredibly well-written (if a little political) cartoon explaining the entire banking system in 30 minutes. Pt. 1:

[video=youtube_share;Ssa5WNnbGsw]http://youtu.be/Ssa5WNnbGsw[/video]

 

Part 2:

[video=youtube_share;bhBQizelZP8]http://youtu.be/bhBQizelZP8[/video]