“Too much of a good thing is wonderful”-Mae West

Finally, the market went down. Incredible as it seems, even I began to think the markets only went UP Fourteen consecutive pluses for the S&P. Whoda thunk it! Greece? No problem (exccept if you’re German.) Dubai? where is that? Spain,Italy, England? Don’t be a worrywart?And certainly, as long as yours truly remains in a disaster mode, you just KNOW the markets will pretend their is no such thing as bad news and work its way higher.

But the world is now swimming in a great tide of central bank liquidity. Forgetting for a moment about the potential inflationary impact somewhere down the road, let us quickly look at where we are, because , as the American icon Yogi Berra has said, “when you come to a fork in the road, take it”. The fork is now a liquidity trap.

No question the central banks had to pump money into the system to keep it alive. But, like everything else, too much becomes well, just too much. After you have had your 3d or 4th Big Mac or 10th Heineken or whatever does it for you, you reach a point of diminishing returns.

We have reached a point now where all the money in the world being added by the central banks (you know, quantitative easing and all that) has now reached a point where it is NO LONGER DOING ANY GOOD: The markets are choking on money. And, as previously mentioned here, the lack of investment opportunities due to, in part, the deflationary spiral which is gripping the world, is forcing all this money into the financial sector. So it is no wonder markets are rising in spite of the fact that fund managers have less and less money to invest. The central banks are aiding and abetting this circus by putting money into a system that can no longer absorb it, and frankly doesn’t need it.

And now, the punch bowl is slowly being taken away, the patient is receiving methadone, not pure heroin. And this is in the form of interest rate hikes, which the market REFUSES to believe (contrary to what they might say)  Can you say INDIA?

However, what another unintended consequences of all this has been is to turn the world into ZOMBIE JAPAN.

For 20 years the sure thing has been to short Japanese government debt. And for 20 years, that sure trader has been wrong.Of course this type of arrangement insures the
zombie financial system eats the rest of the economy so that the Wall Street zombies turn into the Main Street zombies.

If, and when, anyone tightens the reverberations around the world will be the equivalent of a tsunami.The banks know this. So they are faced with the following dilemma: do they keep forcing money into a system that is already gorging on an excess of money, or do they startto hike rates? But the wild card here is that SOMEONE will force them to do it prior to when they want to, andthere will then be the inevitable race to the bottom.

The pundits are saying, “well the market discounts the fact rates will go up” Right!

CDO TRADERS are looking for an implosion in Europe, in case you haven’t noticed.The cost of credit protection on Greece went from 287 bps to 313 bps; Italy went from 91 to 97 bps,, and the UK went from 69 to 73 bps in the past three days ending Thursday,

AND REGARDING CREDIT, I will just add this.If one were to the think of the market being primarily determined by the predominantly retarded action in the no-volume equity markets lately,it might appear we have gone back to the insanuty of the old dot.com days. where each day seemed as though it could or would be the last in the rally, yet with the shorts being terrified of being steamrolled by unnatural market forces (the govt, some nameless Wall Street banks, for example amongst others) followed by a Dow 20,000 (and subsequent move to ZERO at which point we would see the bailout to end all bailouts) But what is notable here is that the credit markets, usually the bastion of rational and reasonable markets has not only BOUGHT into this rally but has, in fact, retrenched. Not only has credit been WEAKER than its January highs but it is also its WIDEST over the past two weeks, just as equities were prepared to go parabolic on no volume and inebriated algorithms.

So this post today is brief, because I need to think aboutwhen the massive deflationary spiral takes us, when will inflation start to bite. You can be sure the market cannot “discount” this coming scenario, as it has never seen this before.

Be concerned with a return OF your money, more than a return ON your money

Until next time

Chuck Karasick