Apocalypse Later! - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 30 October 2013
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Baltimore, Maryland

Yes, it's all decided. Play now. Pay later.

Let's see, stocks moved up again yesterday. With the Dow up 111 points. Gold backed off - by $6. As usual, Bloomberg had a reporter on the playground:

    "It still seems that the Fed has created this good news is bad news, bad news is good news scenario," Randy Bateman, who oversees $15 billion as chief investment officer of Huntington Asset Advisors in Columbus, Ohio, said by telephone. "The anticipation is that the Fed will retain its purchasing of $85 billion in monthly Treasury and mortgage securities, which is going to continue to help the housing market. That will be taken fairly well by the market."

    The S&P 500 climbed in 13 of the past 15 sessions, as companies beat estimates in the current earnings reporting season and signs of slower economic growth fueled bets the Fed will maintain stimulus measures after its two-day meeting that started today. The rally has pushed the index up 24 percent this year, leaving it poised for the best annual gain in a decade.
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    Data today showed retail sales dropped 0.1 percent last month, restrained by the biggest decrease at auto dealers since October 2012. Wholesale prices unexpectedly fell in September as food costs retreated. Inflation has been running below the Fed's 2 percent objective in the near-term, giving policy makers room to maintain monetary stimulus.
Hmm...yes...bad. Janet Yellen does not like to hear about falling prices. She thinks her job is to make them go up. She wants more inflation...not less. So, there will be no tapering anytime soon. You can count on it.

But everyone knows that the Fed's $85 billion-a-month bond buying spree can't last forever. And everyone knows that there will be hell to pay when it stops. Why? Because government finances, stock prices, corporate earnings and the bond market depend on the Fed's EZ money. And nobody wants to find out what happens when the Fed stops. Apocalypse Now? No, they'd definitely prefer an Apocalypse Later situation...

The press referred to the recent threat of a government shutdown as "Apocalypse Now." But it didn't happen. The feds decided to go for Apocalypse Later. They kicked the can down to road to January. There will be no apocalypse then either. Not as long as they still have a foot to boot it with. Apocalypse will be delayed...postponed...and held off for as long as possible.

In the meantime, everyone seems to be enjoying higher corporate earnings. Where do these higher earnings come from? Believe it or not, much of it comes from borrowing! As Chris reported yesterday, corporate America borrowed more than $1 trillion over the last 3 years - at artificially low rates. This increased their debt to $14 trillion, twice what it was when Alan Greenspan issued his famous "irrational exuberance" warning.

The cost of credit is so low that even the most reckless and least creditworthy corporations can still get loans...and stay in business. Junk bond defaults are running at only 1.6% -- a third the average level of the last 30 years. Meanwhile, the first 282 companies reporting earnings this season showed profits up 5.7% on sales increases of only 3.5%. How can you increase profits 60% faster than sales? Easy...you borrow cheap money and lower your financing costs. Everyone knows that can't last. Corporations can't continue to borrow so much money at such low rates. But everyone is perfectly happy to postpone that apocalypse too.

Stock market investors are no dopes either. They know this Fed-driven bull market must come to an end sometime. By many different measures -- P/Es...margin accounts...enterprise values...investor sentiment -- the stock market is already in the danger zone.

What will happen? Either the Fed will really begin to taper - probably causing a crash. Or investors will get tired of investing real money in a phony trend. Either way, when the apocalypse comes...it will be later.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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3 Responses to "Apocalypse Later!"

sreeraj

Nov 3, 2013

fed will print till dollar and the economy collapses. There is no turning back. biggest crisis that you will ever see. Its a mathematical certainty. be prepared.

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Prof. NV Ratnam

Oct 31, 2013

How the Fed(USA) policy on exclusive reliance on QE works is an enigma-will it undermine rest of the world as a reserve currency?Is it, as you say, a sub-prime balloon burst(2008) in reverse in the making......with dollar QE? Seems to be the Keynesian stimulus for growth with no digging & filling!!!
Paul Kruger argues that any country pumping its own currency is safe/beneficial as QE(eg Japan)-When does the USA reach the bottom? More importantly, what about a reserve currency like $ doing it? What will be the short/mid/long term economic (leave alone ethics) impact on its own and the rest of the world, particularly in the context of bloated liquidity?

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Prakash Baxi

Oct 30, 2013

Can anybody explain me , if FED does not achieve its target of inflation and unemployment, how long they can continue this Q.E. ? What will force them stop QE and withdraw ?

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