– Why government intervention has destroyed any semblance of a market.

– How high frequency trading has gamed the system, rigging the market against true investors.

– How the Fed’s last ‘golden bullet’ is a sweeping devaluation of the dollar to force those hoarding cash to spend their money in anticipation of inflation.

Listen to Part 1

Listen to Part 2

Promising low rates for long periods of time is particularly pernicious following periods of credit crises, points our Arun Motianey, now with Roubini Global Economics, in his book SuperCycles. In a discussion of Japan’s low policy rates over the last 15 years, Motianey points out that deflation became worse the longer Japan’s equivalent Fed Funds rate stayed at zero.

Motianey argues a slightly different transition mechanism that pushes the economy into deflation, mainly through lending markets. He argues that after a credit crisis, government-supported banks are borrowing at close to government rates and at the same time being coerced to lend at rates lower than they would otherwise demand for the risk of default. The result is that they demand higher credit standards (typically higher operating cash flow) of their borrowers. Borrowers, mostly companies, oblige by halting the growth in or cutting the nominal wages of workers. Generalized price deflation typically follows wage deflation.

Motianey sums up his argument up this way, “Very low nominal rates cannot be used to fight deflation, since they are, in these conditions – the condition of banking system distress – the cause of deflation.” He calls this the Paradox of the Zero Bound.

Read the full article by Hussman Funds

Investors cannot move for the weight of broker research comparing the current conjuncture in the US with Japan a decade ago. While bond markets at least, move to discount deflation, most sell-side analysts still say the current situation is unlike Japan a decade ago. They are right. Things now in the US are much, much worse than Japan a decade ago.

On what many are calling a ‘bond bubble’. Edwards pins it when he refers to the performance of JGBs…whoda thought long-term JGBs would be a top-performer back when they yielded 3.5% and Japan was pushing the fiscal limits. My, how the bond market put those deniers to shame.

There is still too much hope about. Until the mantra changes from “Equities for the long term” to “Bonds at any price”, we will not have completed our Ice Age journey. It has been a difficult road for me personally for the last 14 years during which I have been laughed at and my ideas dismissed as the attention-seeking ravings of a lunatic. But as we complete the path set out below over year, the Japanese template of supposedly ‘expensive’ bonds outperforming supposedly ‘cheap’ equities; this will feel nothing like a flesh wound…

Finally, as the fog of confusion (or fear?) clears, he drops this bomb. If one is looking for a structural bottom to this secular bear, then 450 should be the target on the S&P. Good times.

QE2 here we come. However, despite being aggressive Bernanke won’t be early to the party.

Watch the Bloomberg Video

Last week, the markets responded to further evidence of a slowing in economic activity, including a further deterioration in new claims for unemployment. Given that the sharpest deterioration in leading economic measures such as our Recession Warning Composite and the ECRI weekly leading index growth rate occurred in the May-June period, we will remain concerned about deterioration in employment conditions through the October-November time frame, based on typical lags in the data. Weakness in the ISM data typically follows leading economic measures more quickly, so the August and September readings will be important data points. Clearly, we are in the window where the market would be expected to be very sensitive to changes in the economic outlook, which is largely what we observed last week in both stocks and bonds.

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Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar

A week ago, the Federal Reserve initiated a new program of “quantitative easing” (QE), with the Fed purchasing U.S. Treasury securities and paying for those securities by creating billions of dollars in new monetary base. Treasury bond prices surged on the action. With the U.S. economy predictably weakening, this second round of quantitative easing appears likely to continue. Unfortunately, the unintended side effect of this policy shift is likely to be an abrupt collapse in the foreign exchange value of the U.S. dollar.

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…and the result of a liquidity trap is a bull market in bonds (refer to the 1930s at the left side of the graph):