Something Really Ugly Is Brewing...

I know the financial stocks have been sucking wind lately but I had not really looked at them until today.  Financials make-up the highest percentage of stocks by sector in the S&P 500 and thus can be considered a good market signal for information, in general, about what is going on systemically.   Currently the SPX is down about 4.4% from its high close this year.  But take a look at some of the huge banking/Wall Street stocks:   Since Jan 18, AIG is down 55%, BAC -33%, GS is down 22%, Citi down 20% and WFC is down 25% (since Feb 14 on WFC).  There's no way of knowing for sure what exactly is going on systemically other than to know that something very ugly is occurring. 

Of course, we can take a stab at it based on what we know about the economy and what the Fed is doing.  I have believed all along that the "QE" aka money printing has been first and foremost a means to keep the big banks from collapsing and, secondarily, to keep the Federal Government - and de facto most States - from having to close down most operations.  After all, the banks are still paying record bonuses and the Government is still happily funding Entitlements and Defense.  The only constituency not benefiting from the money printing - and that constituency which is, prima facie, the target of the QE - is the unemployed (or at least the jobless who want jobs and are not living off of unemployment welfare).

Now, we all know that the poker faces in NYC and DC are expressing that they are going to hold firm with no more QE.  But does that makes sense given what we know about how bad the economy is AND the dismal performance of the too-big-to-fail banks?  Quite frankly, the stock performance of these banks, especially that of AIG and BAC are telling me that there is a massive liquidity problem going on in the banking system.  The two entities that should have been allowed to fail, AIG and BAC, but were saved are reflecting this in the performance of their shares.  We also know that Goldman was one of the heaviest users of emergency borrowing from the Fed during the last crisis, ostensibly because its fate was wrapped around AIG back then. 

And one more point.  Zerohedge.com has been doing a marvelous job at tracking the flow of new Treasury bond issuance as it gets repurchased from the primary dealers by the Fed shortly after the Treasury issues it.  On average and in general, the Fed has been rapidly taking up to 50% or more of recent Treasury issuance off of primary dealer balance sheets.  The PD's have been taking, on average, over 50% of all Treasury issuance.  See what's going on here?  We also know that since December, the Fed has monetized in excess of 100% of all new Treasury issuance.  Here's the latest evidence per Zerohedge:  LINK

I've been saying for quite some time that housing was still going south and that banks are choking on mortgages that  not being paid AND not classified as in default or in foreclosure.  The Fed has enabled this game with its money-printing.  Unless some miracle comes along from some corner of the universe OR the Fed folds on QE, something VERY bad is coming our way....got gold?