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Asset Inflation/Deflation: The Fed’s QE2 vs. $15 Trillion in Losses

Asset Inflation/Deflation: The Fed’s QE2 vs. $15 Trillion in Losses

Courtesy of Charles Hugh Smith, Of Two Minds

Given that the economy faces $15 trillion in writedowns in collateral and credit, the Fed’s $2 trillion dollars in new credit/liquidity is insufficient to trigger either inflation or another speculative bubble.

"Don’t fight the Fed" is supposed to be a strong argument for being bullish on the U.S. economy and stocks. We all know the Federal Reserve is about to unleash a torrent of money into the financial markets via its QE2 (quantitative easing) campaign of buying Treasury bonds directly and pulling various other monetary levers to open the liquidity gates.

But before we succumb to the excitement that accompanies the unleashing of the Fed’s supernatural powers, perhaps we should look at some numbers first.

Size of U.S. economy: $14 trillion. Probable size of QE2: $1 trillion. That means QE2 is perhaps 7% of GDP. Even a whopping $2 trillion QE would equal about 14% of GDP.

In contrast, by some measures China opened the floodgates of credit to the tune of fully 35% of their GDP to combat the contraction caused by the global financial meltdown in late 2008: China’s Creative Accounting.

How much collateral and credit will be destroyed as the U.S. economy rolls over into recession/depression in 2011-14? Based on the latest (September 17, 2010) Fed Flow of Funds, here is my back-of-the-envelope estimates of losses yet to be booked in assets (collateral) and credit (debt):

1. Residential real estate: current value, $18.8 trillion. Estimated value in 2014: $13.8 trillion, i.e. a decline of $5 trillion or 26%. If all impaired mortgages are written down or sold for fair market value, I am guessing the full $5 trillion will need to be written off by somebody, somewhere.

My 26% estimate is conservative; according to the Case-Shiller Index chart, a decline of 40% would be required to return the index to the year-2000 level.

2. Commercial real estate (CRE): The Flow of Funds only reports "nonfarm nonfinancial corporate business" so the CRE number of $6.5 trillion is a few trillion light (that is, we need to add in CRE owned by financial corporations). I am estimating writedowns of $3 trillion--a number others have also guesstimated.

Empty malls, empty office parks, empty warehouses, empty retail: they’re all worth essentially zero. The cost of bulldozing them is higher than their auction value.…
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German Greens Propose Radical Greek Debt Solution

Courtesy of The Automatic Earth.

NPC Graf Zeppelin over Capitol 1928

In its German language edition, Der Spiegel ran a piece last night (translation is mine) about a proposal from the German Green Party (Die Grünen) to deal with the Greek debt crisis that is radically different from how its own government has so far approached the situation. The Greens are not in the Berlin government, but they are a force in German politics regardless, if only because the country loves so much to portray itself as green.

The Green Party’s euro working group, made up of foreign policy, finance and economic specialists, first of all says that, realistically speaking,...



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Zero Hedge

Everything That Is Wrong With Banking Today

Courtesy of ZeroHedge. View original post here.

Submitted by smartknowledgeu.

Here is the latest SmartKnowledgeU Podcast #5: "Everything Wrong With Banking Today".

To listen to this podcast on YouTube, please click the above image and then click the link "Watch this video on YouTube."

For those of you that would like a downloadable mp3 file of any of our podcasts to listen to at your leisure on your smartphone or iPod, please visit https://www.apple.com/itunes, log in to iTunes and then search the iTunes store for the "smartknowledgeu podcast" which will contain
all of our downloadable podcasts for free. To be informed of when we rel...



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Chart School

ADP Employment Report for April Disappoints Expectations

Courtesy of Doug Short.

The economic mover and shaker this week is the Friday employment report from the Bureau of Labor Statistics. This monthly report contains a wealth of data for economists, probably the most publicized in the near term being the month-over-month change in Total Nonfarm Employment (the PAYEMS series in the FRED repository).

Today we have the April estimate of 169K new nonfarm private employment jobs from ADP. That is the lowest number since the 157K in January of last year, 15 months ago. In addition, the previous month's estimate was revised downward from 189K to 175K.

...

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Kimble Charting Solutions

Bond players are very scared of this…

Courtesy of Chris Kimble.

CLICK ON CHART TO ENLARGE

Bond investors loved the swift decline in Crude Oil that started last fall.

As Crude Oil was falling 60%, popular bond ETF TLT rallied 24%.

As TLT was hitting resistance, Crude Oil was making an attempt to put in a double bottom.

Once Crude Oil looked to have created a “W” bottom at support and started a historic rally, TLT has been falling swiftly, breaking below rising channel support of late.

Has Crude rallied enough? Crude has impacted bond players for months, watch Crude closely in the days ahead!

-

To become a member of Kimble Charting Solutions, click ...



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All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Sabrient

Sector Detector: Bulls hold the line as market coils in anticipation of a bigger move

Reminder: Sabrient is available to chat with Members, comments are found below each post.

Courtesy of Sabrient Systems and Gradient Analytics

After posting record highs the previous week, stocks closed last week slightly down overall. But the major indexes held their psychological levels, including Dow at 18,000, S&P 500 at 2100, NASDAQ at 5,000, and Russell 2000 at 1200. Although the bulls continue to find reliable support levels nearby, strong overhead technical resistance and neutral-to-defensive rankings in our SectorCast fundamentals-based quant model continue to suggest that a major upside breakout is not quite imminent, although a selloff doesn’t seem to be in the cards, either. Overall, stocks appear to be coiling ever tighter while awaiting...



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OpTrader

Swing trading portfolio - week of May 3rd, 2015

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Mapping The Market

An update on oil proxies

Courtesy of Jean-Luc Saillard

Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself. 

Since...



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Digital Currencies

Why Bitcoin's male domination will be its downfall

Here's an interesting argument by Felix Salmon, although I think he is taking two correct observations and mistakenly attributing a cause-and-effect relationship to them: Bitcoin is going nowhere because women are not involved.

More likely, in my opinion, women are not involved in bitcoin because bitcoin is going nowhere (and they know it). Or maybe, simply, bitcoin is going nowhere and women are not involved. 

Why Bitcoin's male domination will be its downfall 

By Felix Salmon

Nathaniel Popper’s new book, Digital Gold, is as close as you can get to being the definitive account of the history of Bitcoin. As its subtitle proclaims, the book tells the story of the “misfits” (the first generation of hacker-l...



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Promotions

Watch the Phil Davis Special on Money Talk on BNN TV!

Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene

 

The replay is now available on BNN's website. For the three part series, click on the links below. 

Part 1 is here (discussing the macro outlook for the markets) Part 2 is here. (discussing our main trading strategies) Part 3 is here. (reviewing our pick of th...

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Market Shadows

Kimble Charts: South Korea's EWY

Kimble Charts: South Korea's EWY

By Ilene 

Chris Kimble likes the iShares MSCI South Korea Capped (EWY), but only if it breaks out of a pennant pattern. This South Korean equities ETF has underperformed the S&P 500 by 60% since 2011.

You're probably familiar with its largest holding, Samsung Electronics Co Ltd, and at least several other represented companies such as Hyundai Motor Co and Kia Motors Corp.

...



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Pharmboy

2015 - Biotech Fever

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

PSW Members - well, what a year for biotechs!   The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down!  The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months.  What could go wrong?

Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.

Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies.  A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...



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Help One Of Our Own PSW Members

"Hello PSW Members –

This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at jennifersurovy@yahoo.com with any questions.

Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743

Thank you for you time!




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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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