Listen Up Folks
By Karl Denninger
Posted 2011-02-22 13:05
If you read the tea leaves - and the rumors - you're damn close to being convinced that Bernanke is going to be forced to pull system liquidity.
I offer as evidence cotton, wheat, corn, soy and more. All in the toilet.
Crops suddenly got better? No. In fact there's a report out stating that huge parts of the nation will likely suffer monstrously bad flooding - which just happens to be prime cropland.
No, what's being taken off the table today are liquidity bets. Bets that Bernanke would continue QE2, then do QE3, 4, 5, and on.
Not today.
Today the belief is that he is going to have to stop.
Do you think he read my Ticker from the weekend? ( #msg-60167810 ) I doubt it.
But can the market force Bernanke to stop? You bet it can. The world can riot. Libya can spread. Baharain can go down. Maybe even Saudi Arabia.
There's no "second chance", no "second look", no time to make a decision once those events happen. The consequences will be catastrophic and immediate.
I've warned of this since 2007. I'm convinced I'm right - more so today than I was then.
Here's the problem folks - even on the most-reasonable read of the market's actual earnings power less the pumpage, we get a "fair value" around 900. But that includes the federal government's pumpage.
Take that out, 13% of GDP disappears overnight. Then the knock-on effects show up, and likely double that.
What does the SPX trade at if we have a 25% contraction in GDP, with virtually all of it coming out of margins? Hint: Name the industrial companies with a pre-tax operating margin in excess of 25%. It's a short list.
Be careful folks.... they're handing these out today for people who are too-highly leveraged....
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