A warning from trader Dan Norcini.

Norcini - If This Happens, It Will Signal A Collapse
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/5/11_Norcini_-_If_This_Happens%2C_It_Will_Signal_A_Collapse.html

Taco wrote:

A warning from trader Dan Norcini.

Norcini - If This Happens, It Will Signal A Collapse
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/5/11_Norcini_-_If_This_Happens%2C_It_Will_Signal_A_Collapse.html

Taco, since you love to post this kinda stuff and seem so paranoid about it, let me ask you a common sense question which I hope you can answer on your very own instead of outsourcing the thinking function to people you watch on Youtube.

IF

“The Fed can’t let this happen. What alternative do they have? I’m not a fan of central banking, but what are they going to do? Do they just let this deflationary tsunami engulf the planet? This is the Great Depression II that Bernanke fears and he will not let this happen."

THEN WHY

"In my opinion you will see creative additions of liquidity that will be added to the system in ways that will initially shock market participants, but they will come to expect it and embrace it over time.


The bottom line is Bernanke may not want to do another round of QE, due to the political implications, but the market may force his hand if stocks and interest rates really begin to plummet.”

QE INVOLVES THE GOVERNMENT PRINTING MORE MONEY AND USING IT TO BUY TREASURIES OF VARIOUS MATURITIES EFFECTIVELY DRIVING INTEREST RATES DOWN. SO IF THEIR CONCERN IS LOW RATES, WHY NOT DO THE OPPOSITE - SELL TREASURIES AND DRIVE UP YIELDS?

Rock, I think the concern is not about low rates per se, but rather what it says about the world's economy if investors can't find any place better to put their money than in 10-year notes that yield under 1.8 percent, just because they are considered safe. The low rates are a symptom of a bad economy, not the cause of it.

Low interest rates have been Bernanke's main approach for jump-starting the economy. But it hasn't worked out because banks aren't lending to businesses by and large, and people are still engaged in deleveraging from the bubble years. The answer is bypassing the banks and injecting new money directly into the real economy, but that can't happen in the Fed system.

Well Rock, that sky rockets the annual debt interest payments to the US Treasury, destroying the USA at some point.

That's the box.

In order to keep equity and RRE prices elevated TheBernank has to keep rates artificially very low, but this destroys return and forces everyone in to bubble IPO's like Groupon (down-60% in 6 months) where capital is risked. Sure, GS make out like bandits but the retail investor gets 1% on their CD and their 401k treads water.

If the SPX nose dives, it destroys many SP500 firms who use their pensions and stock valuation as collateral. It kills most US pension plans by -50% or more. That was the risk in March of 2009. Just one quarter at 700 SP and it was all over. Just one week did massive damage.

So you end up with Japan, with Greece at the end.

If he sells treasuries, this dumps the market and the rates shoot the moon.

This makes USA annual interest payments go from $200Bn to $800Bn.

Then it is Game Over as a debt spiral occurs and servicing costs on the 16Tn crowd out everything else. The economy tanks, UE goes to 20%+, pay checks are delayed, pensions not paid or devalued, and people stand in line to get free food.

This is no longer hypothetical - it is what is happening in Greece right now.

Basically what happened in the FSU between 1989-1993.

USA RRE prices are low and still creeping down after 6+ years, and that's with 3.75% rates and a 2.0% 10-year, which is what most loan rates are indexed to plus points.

If the 10-year goes to 1.8 or even 1.15 (!!!) and home sales still stagger along at 400k per year, what do you think is going to happen when/if rates rise to the reversion to mean of 5.0%?

What happens is that house prices fall further (charge more for interest, the asset must drop in value to compensate as less money is available to buy it and instead goes to servicing) and the retirement of tens of millions is wiped out as they have little or no positive equity to sell to nest egg on. That's if anyone could afford to buy and that's looking less and less likely as the Gen-X'ers don't have the money.

At best the USA is looking forward to 20 years of Japan - 1 or 2% growth.

In an immigrant nation with a growing population and workforce.

The USA cannot sustain UE, or social cohesion, with chronic 1.5% growth rates for a decade. Millions more will be out of work.

It's bad and it's going to get worse, barring some major scientific breakthrough which could definitely happen. 20 years is a long time.

gsjackson wrote:

Rock, I think the concern is not about low rates per se, but rather what it says about the world's economy if investors can't find any place better to put their money than in 10-year notes that yield under 1.8 percent, just because they are considered safe. The low rates are a symptom of a bad economy, not the cause of it.

Low interest rates have been Bernanke's main approach for jump-starting the economy. But it hasn't worked out because banks aren't lending to businesses by and large, and people are still engaged in deleveraging from the bubble years. The answer is bypassing the banks and injecting new money directly into the real economy, but that can't happen in the Fed system.

Then why not adjust that approach now since its not working? If Fed buys back bonds in a big way, yields will shoot up and investors will be able to get a much higher returns on 10-year notes not to mention longer bonds. Think Paul Volcker.

Like globe says above, if interest rates go up significantly then so does the federal government's cost of borrowing. For all the hand wringing about the deficit, it's manageable as a percentage of GDP right now because the debt service costs are so low. Let interest rates on US securities go up, and the federal deficit really does become a problem.

Rock wrote:

Then why not adjust that approach now since its not working? If Fed buys back bonds in a big way, yields will shoot up and investors will be able to get a much higher returns on 10-year notes not to mention longer bonds. Think Paul Volcker.

If the FOMC buys the bonds, the Fed's balance sheet goes to $4Tn and beyond.

It becomes the only buyer of Treasury debt, but it's backstopped by the US Treasury and taxpayer.

It's an Ouroboros circle jerk that results in money printing and inflation.

Then the rates explode the US deficit and debt even though investors get a higher return on their inflated dollars.

There is no way out of the box of deficit spending and exponents.

Either bad debt needs to be defaulted on or inflation makes the debt go away.

There are no alternatives, and you can see the now suppressed USA growth rate of 1.5% yoy GDP growth. That's not good and it bodes ill for long term, structural unemployment.

Just like Europe has had for the past 20 years.

Do not spend money you do not have. A simple lesson that needs to be re-learned every human lifespan.

Well then, here's a radical idea. Why not slash military spending which could move us from deficit to surplus, and then use the extra money generated to start paying-off debt and/or buy back bonds?

OK, I know that's probably an impossibility in our country. But if it could be implemented, what's the flaw.

BTW, Japanese government debt as percentage of GDP is much higher than ours. But I believe most of theirs is supported by domestic savers.

The US is spending almost twice as much as it brings in each month. The big culprits are Social Security, Medicare, and Defense spending. Each one of those needs to be cut in half right now. I know a lot of folks who live on $900 - $1500 in Social Security, so this is not as easy as it seems. Just cutting defense spending, which NEEDS to happen, doesn't get us anywhere near where we have to be.

Simoun wrote:

The US is spending almost twice as much as it brings in each month. The big culprits are Social Security, Medicare, and Defense spending. Each one of those needs to be cut in half right now. I know a lot of folks who live on $900 - $1500 in Social Security, so this is not as easy as it seems. Just cutting defense spending, which NEEDS to happen, doesn't get us anywhere near where we have to be.

OK, I just looked up 2011 figures:

Tax Receipts: $2.3 tn
Total Spending: $3.6 tn
=> Deficit: $1.3 tn or same as in 2010

Of Total Spending
$0.7 tn Defense
$0.7 tn SS
$0.8 tn Medicare and Medicaid

Your right, the numbers sure don't look pretty.

Well, the deficit's not in social security tax receipts because it is a separate fund that's been in the black for years. The government keeps borrowing from the fund to finance its various wars, and, ironically, borrowing from the Chinese for the same purpose so that we can encircle China with our military might.

Yeah, it's interesting to speculate what the US could do if it didn't choose to fight all these optional wars. But since defense contractors control Washington, that's not in the realm of possibility.

gsjackson wrote:

Well, the deficit's not in social security tax receipts because it is a separate fund that's been in the black for years.

No it isn't.

This fact needs to be pounded into the heads of every American - there is NO SS Trust Fund.

It does NOT exist.

It is only a 4-drawer, 5 foot tall filing cabinet in an office in Pakersburg, WVa. It's pieces of paper that the Gov owes itself. All excess funds were spent over the past decades on any budget item, mixed into the General Fund. It is full of worthless IOU's.

In order to 'cash' those bonds, they need to be redeemed and right now that means that either the money needs to be printed or new debt in the amount of the SSBond needs to be issued on the world market.

Current SS tax revenues are NEGATIVE to current payouts, have been since 2009 and this was NOT supposed to happen until 2017.

SS is a tax.
You are not 'owed' your 'balance'.
You do not have 'an account'.
There is no 'Trust Fund'.

You believe a lie, a fiction.

We were all lied to, duped, tricked, scammed, conned. The sooner you understand this the better.

Currently SS is making the deficit and debt larger each year, by about $50Bn. This contribution is only going to get larger as SS adds to the problem, and then any 'redemption' of those SS Trust Fund 'bonds' will add to new debt as well.

If you want a realistic estimate, look at your SS statement and multiply by o.40 to get what your monthly check will be, in inflated dollars with gasoline costing $6/gallon and a CNY:USD cross of 3:1.

There is no trust fund only because it's been plundered by pols who want the money for other priorities, such as discretionary wars -- and I think the semantic distinction is important when it comes to prioritizing, which some here are prepared to do rather ruthlessly. People look at their tax stubs and see that part of their money has been specifically earmarked for social security and Medicare -- programs that have consistently demonstrated their political appeal and support. So they need to know that this money is being stolen.

More economic alarmism......

If the economy and the stock market crash, then good. It will purge the inefficiencies out of the marketplace and leave us with a market to build upon with double digit growth for another 2 generations. That's not a bad thing if you are prepared.

How do you prepare? CASH. Cash is king and it should be split between the US dollar, the Canadian dollar, the Aussie dollar (total about 65%). You should also be having a smaller position in gold, platinum, and palladium (total about 35%). With these, you would likely be able to jump in the markets after a drop of more then 50%, and you could add cash to a bond index fund when interest rates return to double digits.

Be among the few who benefit from market meltdowns, not the clowns that lose their shirts. Learn to think like a contrarian who acts before the crowd does. In before everyone else, and out before everyone else. That wins you the game in finance.


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Feel free to visit my sites and to leave your respected words of wisdom:

http://thedeclineofmyamerica.blogspot.com/

http://www.youtube.com/user/ContrarianExpatriate

Contrarian, what about the Euros?