Deformations On The Dealer Lots: How The Fed’s ZIRP Is Fueling The Next Subprime Bust

Submitted by David Stockman – The Contra Corner Blog

On any given day, Janet Yellen is busy squinting at 19 essentially meaningless labor market graphs on her “dashboard” looking for evidence that ZIRP is working. Well, after 71 months of zero money market rates—-an unprecedented financial absurdity—-there are plenty of footprints dotting the financial landscape.

But they have nothing to do with sustainable jobs. Instead, ZIRP has fueled myriad financial bubbles and speculations owing to the desperate scramble for “yield” that it has elicited among traders and money managers. indeed, the financial system is literally booby-trapped with accidents waiting to happen owing to the vast mispricings and bloated valuations that have been generated by the Fed’s free money.

Nowhere is this more evident than in the subprime auto loan sector. That’s where Wall Street speculators have organized fly-by-night lenders who make predatory 20% interest rate loans at 115% of the vehicle’s value to consumers who are essentially one paycheck away from default.

This $120 billion subprime auto paper machine is now driving millions of transactions which are recorded as auto “sales”, but, in fact, are more in the nature of short-term “loaners” destined for the repo man. So here’s the thing: In an honest free market none of these born again pawnshops would even exist; nor would there be a market for paper backed by 115% LTV/75-month/20% rate loans to consumers who cannot afford them.

Exactly When I’ll Buy Back into US stocks

Submitted by Bill Bonner – Chairman, Bonner & Partners

The Dow posted another record high yesterday.

Gold was flat.

We began buying gold in the late 1990s, when it was still cheap.

To illustrate just how cheap it was, for a brief moment in 1980 you could buy nearly all of the 30 Dow stocks for just 1 ounce. By 1999, the Dow had risen so high that you would have needed 43 ounces to perform the same trick.

At this point, you could scarcely go wrong buying gold and selling stocks. Stocks were expensive; gold was cheap.

We are too lazy to do real stock research. And we are too inattentive for trading or meticulous timing systems. We don’t aim to beat the market. “Live and let live” is one of our market mottos.

Here’s an easy way to do it – a refinement of our Simplified Trading System (STS) described in previous Diary entries.

You are either in stocks. Or you are in real money – gold. You buy stocks when they are cheap. You sell them when they are dear.

And you use roundish numbers to make it easy. When the Dow components are selling for 5 ounces of gold or less, you buy the Dow. When they are worth more than 20 ounces, you sell.

ECB Buy Gold Bullion?

Submitted by Mark O’Byrne  – Founding Partner of  GoldCore

Concerns about deflation, recession and a return to the Eurozone debt crisis, may see the ECB follow Japan and print money to buy assets including shares, exchange traded funds and physical gold.

Counter intuitively, gold prices fell on the quite bullish news. In marked contrast to the sharp falls gold saw on the mere rumour of small Cyprus selling their miniscule gold reserves. Such odd trading leads to continuing concerns that the precious metals markets are still being manipulated.

Over the last couple of months, the ECB has launched several measures to revive the lacklustre euro zone economy. Mersch said the bank should let these steps take effect first before considering more action.

If more action was needed, the ECB’s hands wouldn’t be tied as it could theoretically purchase government bonds or other assets such as gold, shares, or exchange traded funds (ETFs).

But he said the bank was not determined to buy up assets come what may and should consider its actions carefully. He warned about the negative side effects were the central bank to start buying up government debt, urging political leaders instead to reform their economies to boost growth.

“Easing of monetary policy cannot work effectively when the European economy is structurally not in good shape,” Mersch said in a speech at an annual banking conference in Frankfurt.