If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Politicians Have Let Us Down...Again
06/27/2012 9:30 am EST
As we enter the back stretch of a presidential election cycle, it's fairly clear that Wall Street is waiting for Washington, and our elected officials are more concerned with re-election than fixing our financial system and economy, observes Richard Young of Intelligence Report.
$100 trillion in derivatives. What do you think? Can you even get a grip on this huge number?
Back in 2010, a midwestern investment firm initiated a wave of sell orders that ended with the now-infamous flash crash. High frequency and algorithmic trading fired up what would ultimately lead to a Dow crash of nearly 1,000 points in under 30 minutes. Since 2010, the high-frequency, algorithmic environment has become even more scary.
And while the $100 trillion international derivatives market noted above is a monster number, it is sadly outdated. Since 2000, the international derivatives market has grown exponentially at a compound growth rate of nearly 20% per year and now stands in excess of $700 trillion.
Moreover, the ten largest banks in America control nearly 80% of total banking assets today. Talk about monumental risk concentrated in a small playing field. I am unsure how to even quantify such a risky environment for you. And you know what? Deteriorating financial conditions at home and around the world intensify the risk.
America is badly overdue for a massive overhaul in Washington. The entrenched members of the Senate, in collaboration with a sadly overmatched administration, have piloted America's ship of state onto the shoals.
Most Americans are aware of the deficit/debt charade and how we have been head-faked by lousy leadership in Washington. The media, however, continues to hide the true state of the economy from the public.
Look, economic momentum peaked even before 2012 began. My sensitive leading economic indicators composite peaked last December, and has declined in each of the last two months. Today, jobless claims stand ahead of where they were in December, and the latest non-farm employment report was a horror-thon.
The administration was looking for an increase of 158,000 jobs, a rotten number in its own right. Instead, we got a 69,000 mini gain—wide of the mark by over 50%.
In the last two months, the month-to-month change numbers were only half the rate of the prior two months. All four are stinkers. The last of what I would call a decent monthly gain occurred in May of 2010 (that's not 2011). A month ago, it was announced that GDP had advanced by a none-too-hot 2.2% for the first quarter of 2012. Now, we have an Oops revision downward of 1.9%.
Although my index of coincident indicators shows that America has not yet sunk back into recession, there's been a real downshifting in the final half of last year and an unpleasant foul stagnancy since. The big elephant in the room is the lack of job creation.
I keep a log of major job gains or cuts, and here's how it looks. Job losses:
- Recently, Hewlett-Packard (HPQ) announced that it would hack nearly 30,000 jobs.
- At the end of 2008, Citigroup (C) chopped 50,000 workers.
- In early 2009, GM (GM) passed out 47,000 pink slips, and Circuit City bid adieu to 34,000 loyal employees while going under.
- In September 2011, Bank of America (BAC) thinned its ranks by 30,000 poor souls.
And so on and so on. I left out the big gainers, right? No. Not one on my list.
I have worked with all the economic data mentioned above for over four decades, and there is no way I would fail to spot a shift in the economic weather pattern. And there is also no way my current conclusion on the economy is wrong. I used the word stinker, and it fits here as well.
And you know what? The unsettling cherry on the American economic cake is that the p-poor economic momentum has occurred in the face of pedal-to-the-metal money supply growth courtesy of the Fed, and borrowing, debt accumulation, and monster bailouts from the Washington folk. Interest rates are at a secular low, and in the future will be a thorn in the side of economic expansion.
After-tax corporate profits as a percentage of GDP are at a level well beyond any expected cyclical peak. The coming cyclical downdraft will result in a 50% decline.
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