The Market Ticker
Commentary on The Capital Markets- Category [Federal Reserve]

No, really?

The market reversed when Yellen said that certain valuations were stretched.  Her published comments prior to the speech said nothing about social media, but she included it in her "backside report."

Here's the problem: The "real value" of such "businesses" is in fact zero.

"Stretched"?  Uh, that's being kind.  These firms produce nothing.  They in fact only transfer funds from one person to another; in this case they try to entice you to buy something and skim a piece of that via "advertising."  But the so-called "growth" in these firms is a chimera -- before you claim there is "value" here you have to determine from where it has been taken.

Good luck with that given that the usual claim is that the "pie is getting bigger."

No it's not.

What is expanding (again) is financial leverage moved by extremely low manipulated policy rates.  As I have repeatedly pointed out when the interest payment on $1 million moves so you can borrow $6m with the same interest payment there is no incentive to pay down the $1m nor will you -- instead you'll borrow the other $5 million and spend it.

That's what's been done - the money hasn't been used to expand property, plant and equipment, it has gone to executive compensation and stock buybacks.  This is a destructive trend in the extreme because it moves valuation but not value.

How much further does it go before someone raises their hand and calls "bullcrap!"?

I have no idea -- but someone eventually will, and the "people" will wake up in a cold sweat.

Just as happened in 2000.

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Where are all those "QE Forever!" folks now and how many of them are going to publicly admit they were completely full of crap?  I am particularly calling out all the investment managers, the pumpers sent into companies to pimp 401k and similar plans, along with those in the media and press that have made similar claims in public.

Quite some time ago I explained why The Fed had to end QE.  It's really quite simple -- duration matching among bond portfolio managers forced it to end because QE is progressively destroying the return they rely on to fund their obligations, and The Fed knows it.  

The bad news is that just as the bad impact on these portfolio returns came on slowly (and ultimately strangled The Fed's ability to continue QE) it similarly bleeds off slowly and thus the depressive effect on the economy will persist for the next five years as well, slowly fading off.

Here you go folks, in case you missed it:

The Fed will cease QE on schedule.  The taper is not only on, it won't be suspended.  And, withdrawing liquidity, that is, allowing short rates to rise, is on the table too, and almost-certainly sooner than you think.  

It doesn't matter if the market sells off, even if it sells off hard.

Let's see how many honest folks there are who will come out in public and make the admission.

My guess on the over/under: Zero.

smiley

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