“The Federal Reserve will struggle to unwind its giant bond-buying program, says Pimco CEO Mohamed El-Erian.

Although the Fed’s program of purchasing $85 billion of Treasurys and mortgage securities has benefits, it also poses risks and unintended consequences, El-Erian warned while speaking at a panel discussion at the Milken Institute Global Conference in Los Angeles.

It may not be able to end its massive bond buying without “collateral damage,” he said.

“Right now we are seeing distortions in markets,” he explained. “Resources are being misallocated. And already, there are already concerns about bubbles. That’s what gets broken in this journey.”

If genuine, unassisted growth returns, those concerns will fade, but the Fed’s bond buying may not be effective in restarting genuine growth.

“It’s a fifty-fifty proposition,” El-Erian cautioned, saying that explains why there’s so much excitement and anxiety in the market now.

“The Fed will exit under two conditions: either because they are successful or because they become ineffective,” El-Erian noted.

Other speakers on the panel also expressed concerns about the Fed’s bond purchasing.

“I don’t think the central banks or the Fed have thought about how they’re going to get out of the trade,” said Terry Duffy, the executive chairman of CME Group. “I started trading at 21 years old. You always have to have a vision of how to get out of a trade before you get in. The Fed needs to do that before they get in any deeper.”

Minutes of the Federal Reserve meeting last month indicated that policymakers seemed headed to winding down their bond purchasing before a weak March jobs report took them by surprise, according to Reuters. A few of the 12 Fed members hoped to start decreasing the purchases this summer and end them by the end of the year. …”

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“Bill Gross’ latest monthly letter is out, and the title is There Will Be Haircuts.

Haircuts, of course, are a popular topic of discussion ever since Cyprus clipped the savings of large depositors in order to recap the banks.

In his latest letter, Bill Gross points argues that there’s no way that governments will ever be able to reduce total debt to GDP unless they find creative ways to clip bondholders.

He comes up with four main ways.

——————————————————————————————————

(1) Negative Real Interest Rates – “Trimming the Bangs”

During and after World War II most countries with high debt overloads resorted to artificially capping interest rates below the rate of inflation. They forced savers to accept negative real interest rates which lowered the cost of government debt but prevented savers from keeping up with the cost of living. Long Treasuries, for instance, were capped at 2½% while inflation was soaring towards double-digits. The resulting negative real rates together with an accelerating economy allowed the U.S. economy to lower its Depression-era debt/GDP from 250% to a number almost half as much years later, but at a cost of capital market distortions.

PIMCO

Today, central banks are doing the same thing with near zero-bound yields and effective caps on higher rates via quantitative easing. The Treasury’s average cost of money is steadily grinding lower than 2%. If current policies continue to be enforced in future years it will eventually be less than 1% because of the inclusion of T-bill and short maturity financing. The government’s gain, however, is the saver’s loss. Investors are being haircutted by at least 200 basis points judged by historical standards, which in the past offered no QE and priced Fed Funds close to the level of inflation. Large holders of U.S. government bonds, including China and Japan, will be repaid, but in the interim they will be implicitly defaulted on or haircutted via negative real interest rates….”

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“As Greece lurched toward its first bailout in early 2010, the largest bank in Cyprus was stocking up on Greek bonds.

That lethal misjudgment helped drive the government in Nicosia toward a rescue of its own, a 10 billion-euro ($13 billion) project involving measures so novel — beyond an unprecedented raid on bank deposits that sparked a global uproar — that policy makers initially kept them under wraps.

Neither a plan for Cyprus to sell gold reserves nor one to repay a loan from the Cypriot central bank with real estate was disclosed in a statement by euro-area finance chiefs in the early morning hours March 16. The measures were cited by Jeroen Dijsselbloem of the Netherlands, the group’s chief, in a confidential recap, which was obtained by Bloomberg News.

“It’s clear they’re making stuff up as they go along: every bailout is different in an unexpectedly horrible new way,” Alexander Apostolides, an economics lecturer at European University Cyprus in Nicosia and a member of the Cypriot government’s economic-advisory council, said in an interview. “They’re not really thinking ahead.”

With another small country, Slovenia, fighting to avoid the euro region’s sixth bailout, the Cypriot misadventure raises the question of how much policy makers have learned in more than three years of straining against the debt crisis.

Hemmed in by an election campaign in Germany, along with demands of the European Central Bank and the International Monetary Fund, policy makers are fighting record unemployment, a second year of recession and austerity and bailout fatigue to keep the 17-nation currency bloc whole.

Building Institutions…”

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“The next Great Depression is already happening – it just hasn’t reached the United States yet.  Things in Europe just continue to get worse and worse, and yet most people in the United States still don’t get it.  All the time I have people ask me when the “economic collapse” is going to happen.  Well, for ages I have been warning that the next major wave of the ongoing economic collapse would begin in Europe, and that is exactly what is happening.  In fact, both Greece and Spain already have levels of unemployment that are greater than anything the U.S. experienced during the Great Depression of the 1930s.

Pay close attention to what is happening over there, because it is coming here too.  You see, the truth is that Europe is a lot like the United States.  We are both drowning in unprecedented levels of debt, and we both have overleveraged banking systems that resemble a house of cards.  The reason why the U.S. does not look like Europe yet is because we have thrown all caution to the wind.  The Federal Reserve is printing money as if there is no tomorrow and the U.S. government is savagely destroying the future that our children and our grandchildren were supposed to have by stealing more than 100 million dollars from them every single hour of every single day.  We have gone “all in” on kicking the can down the road even though it means destroying the future of America.  But the alternative scares the living daylights out of our politicians.  When nations such as Greece, Spain, Portugal and Italy tried to slow down the rate at which their debts were rising, the results were absolutely devastating.  A full-blown economic depression is raging across southern Europe and it is rapidly spreading into northern Europe.  Eventually it will spread to the rest of the globe as well.

The following are 20 signs that the next Great Depression has already started in Europe…”

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“As we approach the end of April, the inevitable question of seasonality arises. Is it time to sell in May and go away?

While many of my intermediate and long term technical indicators are starting to line up, indicating that it may be prudent to start selling now, I am not seeing the bearish trigger yet. To review, let’s consider the charts from the three major regions of the world, US, Europe and China.

What does defensive leadership mean?
In the US, the stock market remains in an uptrend. The SPX, as shown below, remains in an uptrend and it is above both its 50 and 200 day moving average. For traders, it may be premature to get overly bearish without some catalyst or trigger.

The warning signs are there. Defensive sectors have been leading the market. Analysis from Thomson-Reuters shows that the defensive sectors have fared the best in the May-October period during the 21st Century. Is the market is anticipating a downturn or correction?….”

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“The famously gloomy economist Nouriel Roubini has finally fingered an investment he likes. But his advice carries an expiration date.

Roubini is predicting an uptick in stock prices over the next two years as the Federal Reserve continues its stimulus efforts. But buyer beware, Dr. Doom says, because a day of reckoning is lurking at the end of the two-year horizon.

Roubini, an economics professor at New York University best known for predicting the U.S. housing crisis, thinks the Federal Reserve and other central banks around the world can and will prop up stocks and bonds for the next two years.

The Fed, he said, is creating the same problems that led to the financial crisis in 2008 by keeping rates near zero. “They are creating massive fraud,” Roubini said during a panel at the Milken Institute Global Conference in Los Angeles, Calif. Monday.

He pointed to the junk bond market as one example of a bubble.

“At some point, there’s a levitational problem,” said Roubini.

When gravity sets in, Roubini says there will not be a recession but a depression….”

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“Company guidance during the current earnings season is sparking a tumultuous rotation of money from big, safe stocks into riskier names, according to Peter Kenny, managing director at Knight Capital.

Guidance is a bit confusing at some levels, he noted, particularly with some negative economic trends such as a drop in durable goods order, flat business investment and continued Eurozone weakness.

“We’ve seen the trading off of the earnings very dramatically volatile,” Kenny told Yahoo. “It’s led to a lot of volatility in the overall market.”

Kenny said the “lumpy and uneven” quarterly results has created a lack of market harmony, but has also uncovered some sectors that were previously neglected.

“Earnings and guidance are helping that rotation out of the defensives and into the more risk-oriented or growth-oriented or alpha-oriented issues, and away from the Dow 30 and into the S&P 500,” he said.

Kenny said both small-cap and mid-cap stocks are beating the Dow Jones Industrial Average at the moment….”

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“While many investors see nothing but blue skies for stocks, economic performance around the world continues to sag, creating a “grand disconnect,” according to economist Gary Shilling.

“The reality is that investors are only enamored with what the [Federal Reserve] and other central banks are doing,” he told Yahoo, referring to easing programs.

“Their attitude is don’t fight the Fed. As long as the money is there, I’ve got to own stocks. They couldn’t care less about what’s happening to economies on the ground.

And what is happening to economies on the ground?

“They’re limping along at best,” Shilling, president of A. Shilling & Co., explained. “Europe is in recession, Japan is barely growing and China’s growth is slowing. The U.S. economy is certainly underperforming.”

When you add in investors’ hunger for yield and willingness to ignore major risks to achieve it, “you really have an unsustainable situation,” he said.

So what’s the ultimate outcome of this?

“Nobody will stop a party like this voluntarily,” Shilling noted. “It will only come to a grinding halt when there’s some big shock,” like a blow-up in North Korea or the failure of a European bank….”

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“The consumer economy may look weak. But the affluent and wealthy consumers are ramping up their spending – and that could help drive the broader economy this year.

Two new studies show that wealthier consumers plan to increase their spending despite higher taxes and a generally skeptical view of economic growth and government.

A study from the American Affluence Research Center looked at the top 10 percent of consumers by income who account for more than half of consumer spending. It found that the majority of them plan to spend the same or more in 2013 as they did in 2012….”

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“Austria is reconsidering plans to establish a separate “bad bank” to wind down delinquent loans at nationalized lender Hypo Alpe-Adria-Bank International AG, a move that could add to the nation’s debt.

The government is discussing whether separate wind-down units modeled on Germany’s FMS Wertmanagement AoeR or Austria’s KA Finanz AG would make sense for Hypo Alpe, Chancellor Werner Faymann told journalists in Vienna today. The Finance Ministry is also in talks with the European Union to allow more time for the bank to sell its viable assets, he said.

“There are intensive consultations about whether there could be ‘bad-bank’ parts like the German or the previous Austrian model,” Faymann said after the weekly government meeting. “The goal is to manage as many assets as possible as beneficial as possible.”

Austria is under pressure by EU Competition Commissioner Joaquin Almunia, who is reviewing state aid of as much as 2.2 billion euros ($2.9 billion) the country has provided to the lender since 2008. A firesale of the bank’s assets by the end of the year may cause as much as 14 billion euros of additional losses for Austrian taxpayers, according to a central bank document cited by Profil magazine April 27….”

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“Today at Disrupt NY 2013, Benchmark partner Bill Gurley shared an interesting fact aboutUber. “Uber is growing faster than eBay did,” Gurley said. In 1997, Benchmark invested $6.7 million in eBay. It was worth more than $5 billion less than two years later. Benchmark is also an investor in Uber.

“Uber is probably the fastest growing company that we’ve ever had,” Gurley said. He insisted a lot on the quality of the product. If a company builds a good product, it will grow organically.

Benchmark took part in Uber’s Series A and Series B rounds of respectively $11 million and $37 million. Gurley seemed very satisfied with this investment and only had good things to say about the car company.

“The product is so good, there is no one spending hundreds of thousands of dollars on marketing,” Gurley said. eBay and Uber are both consumer companies that have reached a lot of customers in a very short time….”

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“Slowing inflation is giving central bankers scope to provide the world economy with more liquidity and lower interest rates for longer, all in the name of price stability.

European Central Bank President Mario Draghi may cut his benchmark rate to a record low as soon as this week as ebbing price pressures let him deliver more stimulus to the euro area’s recession-riddled economy. Federal Reserve Chairman Ben S. Bernanke at a policy meeting that starts Tuesday might have more room to press on with asset purchases as the argument against that strategy is undercut by waning inflation risks. Their counterparts from New Zealand to Canada also have more reason to keep policy loose.

The odds of disinflation are mounting as the world economy slows anew and commodity prices slide, defying forecasts that easy money would trigger an acceleration of prices. More than half of the world economy, including the U.S. and the euro area, instead confronts inflation below the central banks’ desired levels, according to Ethan Harris, co-head of global economics research at Bank of America Corp. in New York.

“There is a developing inflation problem: undesirably low inflation,” said Harris, a former Federal Reserve Bank of New York economist. “For central banks, this increases the pressure to maintain super-easy monetary policy.”

Deflation Danger…”

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“…..”Our global economy, reckless in its use of all resources and natural systems, shows many of the indicators of potential failure that brought down so many civilizations before ours,” writes Grantham in his new quarterly letter titled “The Race Of Our Lives.”

In 10 pages, he compiles some key points we’ve heard him discuss at length in his recent media tour.  He spends most of his message on what makes him optimistic.  We summarize is letter here.

Civilizations Fall

Even the greatest civilizations like Rome eventually fell.  Citing research, Grantham told Charlie Rose that civilizations have an average lifespan of around 250.

He hammers on this topic at length in his letter.

“Probably the greatest agreement among scholars, though, is that the failing civilizations suffered from growing hubris and overconfidence: the belief that their capabilities after many earlier tests would always rise to the occasion and that growing signs of weakness could be ignored as pessimistic,” he writes.

Fortunately, we might not be doomed.  Grantham sees two things that might save us.

Declining Fertility

Economist Thomas Malthus warned us that the growing population would eventually outpace the earth’s ability to feed it.

“Malthus, however, completely missed declining fertility, a potentially very long-term and hence much more critical factor to the survival of our species,” writes Grantham. “Neither he nor anyone else before 1960 even dreamed that we would voluntarily decide to have fewer children even as we became richer. In his day and until the early twentieth century, rich families routinely had eight or more children.”

In nearly every major economy, fertility rates have been falling.  He includes five charts showing this, including one that stood out.

GMO

Here’s Grantham…”

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“….In his weekly ‘Sunday Start’ letter, Morgan Stanley‘s Joachim Fels presents the other side of the commodity collapse, and a reason to be optimistic:

Somehow the proverbial American optimism must have affected me also when it comes to the cyclical outlook. What I’ve been telling investors on my trip is that despite the soft patch in the US economic data, the wobbly recovery in China and what looks like a deepening recession in the euro area following this past week’s PMI, Ifo and INSEE business surveys, my confidence in our ‘twilight to daylight’ saga of a second-half global rebound is actually even stronger now. Why? One reason is the much-discussed drop in commodity prices. My sense is that this is not just a reflection of recently weaker global growth data. I rather suspect it is also due to the supply response in many commodity markets that has been elicited by years and years of elevated prices, and to a growing realization by investors that global money-printing does not necessarily lead to high inflation, which has probably reduced the demand for commodities such as gold and oil as inflation hedges. In any case, lower commodity prices lead to what I call ‘good disinflation’ as consumers’ real disposable incomes benefit from lower energy and food prices. Hence, I expect the global soft patch to give way to a consumer-led re-acceleration in the next couple of months.

The second half of the explanation, that there’s been a sea-change in thinking among investors about the relationship between “money printing” and high inflation is an important one….”

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“Federal Reserve Chairman Ben Bernanke and his allies at the central bank haven’t merely
embarked on a misguided policy — they’re a threat to U.S.-style capitalism, says former White House Budget Director David Stockman.

The Fed now determines the level of short-, medium- and long-term interest rates, he told
Newsmax TV in an exclusive interview. “It’s all rigged. This is administered price-setting by 12 people who are not even elected.”

Financial markets now determine prices and “drive the entire capitalist system,” says Stockman, author of the new book, “The Great Deformation: The Corruption of Capitalism in America.”

And it’s the Fed that sets prices in financial markets. “All of the trading today is not based on price discovery as we talk about in free markets or discounting cash flows and earnings in the future,” Stockman says, who headed the Office of Management and Budget from 1981 to 1985 under President Ronald Reagan.

“They’re all trading against what they think the overlords at the Fed are doing.”

Bernanke is “a Keynesian money printer who believes that debt, debt and more debt is the elixir that helps economies grow and people become wealthier,” Stockman says.

“That is utterly wrong doctrine, and it’s nevertheless in the mind of the guy who’s running a system. And he has four or five colleagues who believe the same, and they are dangerous, and they are wrecking our free enterprise system.”

The notion that we don’t have inflation now is off base, Stockman says. “The issue isn’t inflation of goods and services,” he says. “There is another inflation called asset inflation.” And that’s running rampant, Stockman says….”

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“This is always reassuring. SocGen strategist Albert Edwards remains an ultra-bear, and predicts everything will go to hell.

In his new note he writes:

We still forecast 450 S&P, sub-1% US 10y yields, and gold above $10,000

My working experience of the last 30 years has convinced me that policymakers’ efforts to manage the economic cycle have actually made things far more volatile….”

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“The political class set in motion the eventual obliteration of our economic system with the creation of the Federal Reserve in 1913. Placing the fate of the American people in the hands of a powerful cabal of unaccountable greedy wealthy elitist bankers was destined to lead to poverty for the many, riches for the connected crony capitalists, debasement of the currency, endless war, and ultimately the decline and fall of an empire. Ernest Hemingway’s quote from The Sun Also Rises captures the path of our country perfectly:

“How did you go bankrupt?”
Two ways. Gradually, then suddenly.”

The 100 year downward spiral began gradually but has picked up steam in the last sixteen years, as the exponential growth model, built upon ever increasing levels of debt and an ever increasing supply of cheap oil, has proven to be unsustainable and unstable. Those in power are frantically using every tool at their disposal to convince Boobus Americanus they have everything under control and the system is operating normally. The psychotic central bankers, “bought and sold” political class, mega-corporation soulless chief executives and corporate controlled media use propaganda techniques, paid “experts”, talking head “personalities”, captured think tanks, and the willful ignorance of the majority to spin an increasingly dire economic descent as if we are recovering and getting back to normal. Nothing could be further from the truth.

There is nothing normal about what Ben Bernanke and the Federal government have done over the last five years and continue to do today. Truthfully, nothing has been normal since the mid-1990s when Alan Greenspan spoke the last truthful words of his lifetime:

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

The Greenspan led Federal Reserve created two epic bubbles in the space of six years which burst and have done irreparable harm to the net worth of the middle class. Rather than learn the lesson of how much damage to the lives of average Americans has been caused by creating cheap easy money out of thin air, our Ivy League self-proclaimed expert on the Great Depression, Ben Bernanke, has ramped up the cheap easy money machine to hyper-speed. There is nothing normal about the path this man has chosen. His strategy has revealed the true nature of the Federal Reserve and their purpose – to protect and enrich the financial elites that manipulate this country for their own purposes.

Despite the mistruths spoken by Bernanke and his cadre of banker coconspirators, he can never reverse what he has done. The country will not return to normalcy in our lifetimes. Bernanke is conducting a mad experiment and we are the rats in his maze. His only hope is to retire before it blows up in his face. Just as Greenspan inflated the housing bubble and exited stage left, Bernanke is inflating a debt bubble, stock bubble, bond bubble and attempting to re-inflate the housing bubble just in time for another Ivy League Keynesian academic, Janet Yellen, to step into the banker’s box. This genius thinks Bernanke has been too tight with monetary policy. It seems inflated egos are common among Ivy League economist central bankers who think they can pull levers and push buttons to control the economy. Results may vary.

The gradual slide towards our national bankruptcy of wealth, spirit, freedom, self-respect, morality, personal responsibility, and common sense began in 1913 with the secretive creation of the Federal Reserve and the imposition of a personal income tax. Pandora’s Box was opened in this fateful year and the horrors of currency debasement and ever increasing taxation were thrust upon the American people by a small but powerful cadre of unscrupulous financial elite and the corrupt politicians that do their bidding in Washington D.C. The powerful men who thrust these evils upon our country set in motion a chain of events and actions that will undoubtedly result in the fall of the great American Empire, just as previous empires have fallen due to the corruption of its leaders and depravity of its people. Creating a private central bank, controlled by the Wall Street cabal, and allowing the government to syphon the earnings of workers through increased taxation has allowed politicians the ability to spend, borrow, and print money at an ever increasing rate in order to get themselves re-elected and benefit the cronies, hucksters and bankers that pay the biggest bribes. None of this benefit the average American, who sees their purchasing power systematically inflated and taxed away. This is not capitalism and it is not a coincidence that war and inflation have been the hallmarks of the last century.

“A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank. It is no coincidence that the century of total war coincided with the century of central banking.” – Ron Paul

As you can see, the bankruptcy of our country and our culture began gradually, accelerated after Nixon closed the gold window in 1971, really picked up steam in 1980 when the debt happy Baby Boom generation came of age, and has “suddenly” reached maximum velocity as we approach the true fiscal cliff. There were many checkpoints along the way where fatefully bad choices were made. They include the New Deal, Cold War, Great Society, Morning in America, Dotcom New Paradigm, Housing Wealth Retirement Plan, Obamacare, and present belief that creating more debt will solve a problem created by too much debt. The Federal Reserve allowed interventionist politicians to fight two declared wars (World War I, World War II), fight five undeclared wars (Korea, Vietnam, Gulf, Afghanistan, Iraq), conduct hundreds of military engagements around the globe, occupy foreign countries, begin a war on poverty that increased poverty, begin a war on drugs that increased the amount of available drugs, and finally start a war on terror that has increased the number of terrorists and pushed us closer to national bankruptcy. The terrorists have already won, as the explosion of stupidity and irrational fear has allowed those in power to acquire more power and dominion over our lives.

Abnormality Reigns…”

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