Month: August 2014

When the majority of Americans examine the world around them, they see a stock market at record highs and modest apparent improvement in the economy, but, as John Hussman notes, they also have the sense that something remains terribly wrong, and they can’t quite put their finger on it.

Exceprted from John Hussman’s Weekly Market Comment,

According to a recent survey by the Federal Reserve, 40% of American families report that they are “just getting by,” and 60% of families do not have sufficient savings to cover even 3 months of expenses. Even Fed Chair Janet Yellen seemed puzzled last week by the contrast between a gradually improving unemployment rate and persistently sluggish real wage growth.

We would suggest that much of this perplexity reflects the application of incorrect models of the world.

Before the 15th century, people gazed at the sky, and believed that other planets would move around the Earth, stop, move backwards for a bit, and then move forward again. Their model of the world – that the Earth was the center of the universe – was the source of this confusion.

Similarly, one of the reasons that the economy seems so confusing at present is that our policy makers are dogmatically following models that have very mixed evidence in reality.

…

Several factors contribute to the broad sense that something in the economy is not right despite exuberant financial markets and a lower rate of unemployment. In our view, the primary factor is two decades of Fed-encouraged misallocation of capital to speculative uses, coupled with the crash of two bubbles (and we suspect a third on the way). This repeated misallocation of investment resources has contributed to a thinning of our capital base that would not have occurred otherwise. The Fed has repeatedly followed a policy course that sacrifices long-term growth by encouraging speculative malinvestment out of impatience for short-term gain. Sustainable repair will only emerge from undistorted, less immediate, but more efficient capital allocation.

In recent years, the U.S. has experienced a collapse in labor participation and weak growth in labor compensation, coupled with an increasingly lopsided distribution of whatever benefits the recent economic recovery has generated. This is not well-explained by Phillips Curves or simplistic appeals to “insufficient demand,” and it is unlikely to be improved by endless monetary “stimulus” (the targets that clearly occupy the Fed’s thinking). While our economic challenges can be largely traced to more than a decade of persistent Fed-enabled misallocation of capital, most of the costs of this misallocation have fallen on labor because of a) shifting composition of labor demand that has resulted from an increasing share of international trade with countries with heavy populations of relatively unskilled labor; and b) economic features that increasingly create a “winner-take-all” distribution of economic gains. 

One of the key results in international economics is that as trade opens up between nations, those nations will tend to export goods that intensely use the factor (skilled labor, unskilled labor, capital) with which they are relatively well-endowed. In a world where we have opened up trade with countries that are densely populated with unskilled workers, and where the U.S. is relatively better endowed with skilled labor and capital, the result has been something of a hollowing out of the middle class among households that aren’t themselves endowed with skilled labor or capital. Essentially, the U.S. obtains the services of low-skilled labor more cheaply from abroad than domestically. There is no great debate on this point.

Meanwhile, transfer payments like welfare and unemployment compensation allow many households to maintain consumption despite being out of those jobs, and given the ability of households to take on debt, even if they are actually living paycheck to paycheck, the produced goods get purchased, companies make a profit, government runs a deficit, the Fed keeps interest rates low which allows all the debt to be serviced, and everyone is pleasantly, if unsustainably, happy. That’s particularly true as long as nobody asks how the debt will be repaid, which is certainly what Fed policy encourages.

Now, looking at nations as a whole, academic economists proudly derive various theorems to prove that both nations actually benefit in aggregate from international trade. The problem, however, is in the distribution of those gains. This is particularly true in what might be called “winner-take-all” economies.

Why do professional athletes, movie actors, and even some 23-year-old computer programmers earn so much more than teachers, nurses, and factory-line workers? The answer is simple. They’ve found a way to spread the impact of their efforts over a very large number of individuals, while the teachers, nurses, and factory-line workers can apply their efforts to a dramatically smaller number of “units,” be they students, patients, or boxes of Corn Flakes. For massive too-big-to-fail banks, the units are dollars. The downside is that as certain winners are able to spread their efforts over an enormous number of people, the required number of winners declines – ask anyone who has ever tried to become a movie actor or a pro-basketball player. International trade and internet communications, among other developments, have significantly increased that tendency toward winner-take-all outcomes. When that effect is expanded through international trade, the result is that yes, each country benefits in aggregate, but you also observe a “hollowing out” of the middle class, particularly for families that don’t have labor or capital that shares in the distribution.

…

As for the U.S. economy, QE-induced speculation misallocates resources that might otherwise contribute to long-run growth, and while conditions could certainly be worse, the benefits of this economic recovery have been highly uneven. Again, 40% of families report that they are “just getting by,” with the majority essentially living paycheck to paycheck without enough savings to cover even a few months of expenses. We could be, and should be doing better, except that this complex adaptive system of ours responds to good incentives as well as bad ones, and has been repeatedly crippled by policies that have produced waves of malinvestment, bubble, and collapse. The economy is starting to take on features of a winner-take-all monoculture that encourages and subsidizes too-big-to-fail banks and large-scale financial speculation at the expense of productive real investment and small-to-medium size enterprises. These are outcomes that our policy makers at the Fed have single-handedly chosen for us in the well-meaning belief that the economy is helped by extraordinary financial distortions. The Federal Reserve is right to wind down quantitative easing, and would best terminate reinvestment of maturing holdings, ideally beginning in October or quickly thereafter. The issue is not whether the U.S. economy does or does not need “life support.” The issue is that QE is not life support in the first place.

via Zero Hedge http://ift.tt/1nvhQEg Tyler Durden

Just a month ago, Germany’s powerful business lobby threw its weight behind tougher sanctions against Russia (dropping its previous objections). It appears they are now regretting that decision. As The Federation of German Industry (BDI) reports today, exports to Russia in H1 2014 dropped 15.5% from 2013 and “may drop by as much as 25% – posing a risk to 50,000 German jobs.” We are sure, as Zee Germans look across the pond at the S&P 500 hitting record highs, BDI’s conviction that Russia’s action must face significant consequences may just fall apart again.

 

Just 3 weeks ago, Germany’s powerful business lobby has dropped its opposition to tougher sanctions against Russia ahead of today’s crunch EU ambassador meeting in Brussels.

BDI chief Ulrich Grillo said sanctions could would come at a “painful” cost to European business, and to German exporters, but that the game had changed with Russia.

 

“The BDI and I personally have become convinced that the behaviour of the Russian government in the Ukrainian conflict of secession must have noticeable consequences for Moscow, ”

And now… (as Bloomberg notes),

Export of German-made machine spare parts in particular hit by sanctions due to possible dual-use nature of goods, BDI industry group’s East European Committee said today in e-mailed statement.

 

Sanctions also impacting German exports to states linked to Russia via excise agreements: 1H exports to Belarus drop 21%

 

*GERMAN 1H EXPORTS TO UKRAINE DROP 32%: BDI GROUP

 

1H 15.5% drop in German exports to Russia versus 1H 2013 valued at EU2.8b

 

2014 German exports to Russia may drop by as much as 25%, pose risk to 50,000 German jobs

*  *  *
Of course, this should come as no surprise… Is it time to ink that gas-for-land deal?

via Zero Hedge http://ift.tt/1t7ifnF Tyler Durden

Submitted by Justin King (of The Anti-Media) via The Burning Platform blog,

George Orwell ranks among the most profound social critics of the modern era. Some of his quotations, more than a half a century old, show the depth of understanding an enlightened mind can have about the future.

 

1)  “In our age there is no such thing as ‘keeping out of politics.’ All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred and schizophrenia.”

Though many in the modern age have the will to bury their head in the sand when it comes to political matters, nobody can only concern themselves with the proverbial pebble in their shoe. If one is successful in avoiding politics, at some point the effects of the political decisions they abstained from participating in will reach their front door. More often than not, by that time the person has already whatever whisper of a voice the government has allowed them.

 

2)  “All the war-propaganda, all the screaming and lies and hatred, comes invariably from people who are not fighting.”

Examining the nightly news in the run up to almost any military intervention will find scores of talking heads crying for blood to flow in the streets of some city the name of which they just learned to pronounce. Once the bullets start flying, those that clamored for war will still be safely on set bringing you up-to-the-minute coverage of the carnage while their stock in Raytheon climbs.

 

3)  “War against a foreign country only happens when the moneyed classes think they are going to profit from it.”

It’s pretty self-explanatory and while it may be hard to swallow, it’s certainly true. All it takes is a quick look at who benefited from the recent wars waged by the United States to see Orwell’s quip take life.

 

4)  “The very concept of objective truth is fading out of the world. Lies will pass into history.”

My most prized books are a collection of history books from around the world. I have an Iraqi book that recounts the glory of Saddam Hussein’s victory over the United States in 1991. I have books from three different nations claiming that one of their citizens was the first to fly. As some of the most powerful nations in the world agree to let certain facts be “forgotten,” the trend will only get worse. History is written by the victor, and the victor will never be asked if he told the truth.

 

5)  “In a time of deceit, telling the truth is a revolutionary act.”

Even without commentary, the reader is probably picturing Edward Snowden or Chelsea Manning. The revolutions of the future will not be fought with bullets and explosives, but with little bits of data traveling around the world destroying the false narratives with which governments shackle their citizens.

 

6)  “Journalism is printing what someone else does not want printed: everything else is public relations.”

Make no mistake about it; if an article does not anger someone, it is nothing more than a piece. Most of what passes for news today is little more than an official sounding advertisement for a product, service, or belief.

 

7)  “In real life it is always the anvil that breaks the hammer…”

In every conflict, it is not the side that can inflict the most damage, but the side that can sustain the most damage that ultimately prevails. History is full of situations in which a military “won the battles but lost the war.”

 

8)  “The nationalist not only does not disapprove of atrocities committed by his own side, but he has a remarkable capacity for not even hearing about them.”

Haditha. Panjwai. Maywand District. Mahmudiyah. These names probably don’t ring a bell, but it is almost a certainty that the reader is aware of the brutality that occurred in Benghazi. The main difference is that in the first four incidents, those committing the acts of brutality were wearing an American flag on their shoulder.

 

9)  “Threats to freedom of speech, writing and action, though often trivial in isolation, are cumulative in their effect and, unless checked, lead to a general disrespect for the rights of the citizen.”

Everyday there is a new form of censorship or a new method of forcing people into self-censorship, and the people shrug it off because it only relates to a small minority. By the time the people realize their ability to express disapproval has been completely restricted, it may be too late. That brings us to Orwell’s most haunting quote.

 

10)  “If you want a picture of the future, imagine a boot stamping on a human face—forever.”

Once the people are indoctrinated with nationalistic beliefs, and the infrastructure to protect them from some constantly-changing and ever-expanding definition of an enemy is in place, there is no ability for the people to regain liberty. By the time all of the pieces are in place, not only is opportunity to regain freedom, but the will to achieve freedom has also evaporated. The reader will truly love Big Brother.

via Zero Hedge http://ift.tt/1l9EXsq Tyler Durden

As we noted early on, by the time the cash markets opened this morning, the narrative of compliant Kuroda and drug-peddling Draghi had been painted as worth more than a yellowing Yellen's hawkish comments. And so it was that stocks, despite weak macro data this morning in the US – bad news is great news – surged as cash markets opened and tagged S&P 2,000 for the first time ever. However, once Europe closed, that exuberance faded in stocks. Treasuries rallied (30Y closed -2bps) with the front-end weakening very modestly. USD strength (on notable EUR weakness) sent oil and precious metals modestly lower on the day but Copper had a good day (+0.6%). Today was the lowest S&P futures (non-holiday) trading of the year as the Nasdaq rose for the 9th day in a row.

 

So to summarize – Bonds Up, Stocks Up, USD Up… But VIX Up, Oil Down

S&P Tags 2,000… on lowest volume day of the year

 

Since Yellen, stocks are up and fololwing their historical betas…but notice the behavior after Europe closes…

 

The divergence between bonds and stocks remains…

 

Even JPY carry is starting to diverge…

 

as VIX broke higher today…

 

As the surge into the USD brings flows into stocks and bonds… mostly driven by EUR weakness

 

As the USD rose, oil and PMs sankbut Copper bounced back…

 

The standard witching hour startat 8amET once again provided fireworks in commodities…

 

Once Europe closed, bonds rallied – especially the long-end

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1pzbp7V Tyler Durden