-- Posted Monday, 7 January 2013 | | Disqus

Dow 20,000? We seriously doubt it, although our good friend James Tollard explained why he thought it could happen in a guest commentary here last week. What were his reasons? Okay, you’re having a little trouble remembering why he was so bullish. So are we. His arguments didn’t quite stick to our ribs. You may recall there was a lumber chart that accompanied the essay. What was that all about? Well, Jim mentioned that rising lumber prices imply that the uptick in the housing sector is no fluke. Our take is that the uptick is pretty feeble considering how many trillions of dollars the Fed has shot at the singular objective of inflating home prices. We think the housing mini-boom will end by mid-year, followed by a resumption of real estate deflation that eventually will reduce prices to 30% of the peak valuations achieved in 2007.

Jim also mentioned that big companies can borrow for practically nothing. While that may sound like a good thing, the bad news is that they have found little productive use for all of that cheap money. Actually, the best reason they’ve been able to come up with for borrowing it is that they can. Some companies are doing it even though they hold surplus cash of $10 billion or more. And why not? It never hurts to have as much cash on hand as possible for that rainy day, right? Our take is that the rainy day is not going to be quite what corporate treasurers are expecting. While they are looking ahead to the next recession, we see a financial cataclysm taking shape that will turn U.S. corporations’ supposed $2 trillion surplus into a digital black hole overnight.

Bursting Point

It’s not as though the firms have stored this unused, and currently unusable, sum in gold and silver coins and ingots. In fact, most of it is parked in assets directly tied via super-leveraged derivatives to the financial system’s quadrillion dollar Rube Goldberg machine. Ultimately, we see the banks themselves, supposedly flush with reserves, as being in the same boat as cash-glutted corporations. The popular wisdom holds that the banks are in great shape because they’ve offloaded all of their bad paper onto the Federal Reserve. This transparently nutty idea is one of the great delusions of this era. The truth is, the Fed is a financial colostomy bag that no one has figured out how to empty. Our guess is that it will burst long before the Dow Average gets near 20,000.

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-- Posted Monday, 7 January 2013 | Digg This Article | Source: GoldSeek.com

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