Month: September 2014

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

Wyland Stanley Studebaker motor car in repair shop, San Francisco 1919

There are substantial and profound changes developing in the global economy, and in my view we should all pay attention, because everyone will be greatly affected. Some more than others, but still.

‘Metal markets’, be they gold, silver, copper or iron, exhibit distress and uncertainty, prices are falling, or at least seem to be. Partly, that is because of the apparently still ongoing investigation in the Chinese port of Qingdao, through which a $10 billion ‘currency fraud’ is reported today, ostensibly related to the double/triple borrowing that has been exposed, in which the same iron ore and copper shipments were used as collateral multiple times.

This could soon bring such shipments to the market and add to the oversupply already in place. Combined with ever more evidence of a slowdown in Chinese growth numbers, this doesn’t look good for iron, copper, aluminum.

But the Slow Boat To – or from – China is by no means the only reason metal prices are dropping. The main one is, plain and simple, the US dollar. Gold, for instance, hasn’t changed much at all when compared to a year ago, against the euro. Whereas it’s lost 8-9% against the dollar over the last 2-3 months, about the same percentage as that same euro. The movement is not – so much – in gold, it’s in the dollar.

To claim that this is the market at work makes no sense anymore. Today central banks, for all intents and purposes, are the market. As Tyler Durden makes clear once again for those who still hadn’t clued in:

Bank Of Japan Buys A Record Amount Of Equities In August

Having totally killed the Japanese government bond market, Shinzo Abe has – unlike the much less transparent Federal Reserve, who allegedly use their proxy Citadel – gone full tilt into buying Japanese stocks (via ETFs). In May, we noted the BoJ’s aggressive buying as the Nikkei dropped, and in June we pointed out the BoJ’s plan to buy Nikkei-400 ETFs and so, as Nikkei news reports, it is hardly surprising that the Bank of Japan bought a record JPY 123.6 billion worth of ETFs in August.

 

The market ‘knows’ that the BoJ tends to buy JPY 10-20 billion ETFs when stock prices fall in the morning. The BoJ now holds 1.5% of the entire Japanese equity market cap (or roughly JPY 480 trillion worth) and is set to surpass Nippon Life as the largest individual holder of Japanese stocks. And, since even record BoJ buying was not enough to do the job, Abe has now placed GPIF reform (i.e. legislating that Japan’s pension fund buys stocks in much greater size) as a primary goal for his administration. The farce is almost complete as the Japanese ponzi teeters on the brink.

Shinzo Abe wants the yen to fall, and he gets his (death)wish, because the Japanese economy and the financial situation of its government are in such bad shape, there’s nowhere else to go for the yen. That doesn’t spell nice things for the Japanese people, who will see prices for imported items (energy!) rise, but for all we know Abe sees that as a way to push up inflation. That’s not going to work, what we will push up instead is hardship. And that plan to force pension funds into stocks is just plain insane, an idea he got from US pension funds which are 50% in stocks – which is just as crazy.

Draghi talks down the euro, says a headline today, but I don’t see it; I wonder why that would be supposed to work now, and not in the preceding years, when it was just as obvious how poorly Europe was doing. Sure, there’s a new ‘threat’ in the AfD (Alternative for Germany), a right wing anti-euro party, but that’s not – for now – enough to cause the euro slide we’re seeing. The movement is not – so much – in the euro, it’s in the dollar.

Why the Fed moves the way it does, the moment it does, in its three pronged combo of fully tapering QE, hiking rates (or at least threatening to) and pushing up the greenback, is not immediately clear, but a few suggestions come to mind, some of which I mentioned earlier this month in The Fed Has A Big Surprise Waiting For You and in What Game Is Being Played With the US Dollar?.

My overall impression is that the Fed has given up on the US economy, in the sense that it realizes – and mind you, this may go back quite a while – that without constant and ongoing life-support, the economy is down for the count. And eternal life-support is not an option, even Keynesian economists understand that. Add to this that the -real – economy was never a Fed priority in the first place, but a side-issue, and it becomes easier to understand why Yellen et al choose to do what they do, and when.

When the full taper is finalized next month, and without rate rises and a higher dollar, the real US economy would start shining through, and what’s more important – for the Fed, Washington and Wall Street -, the big banks would start ‘suffering’ again. Just about all bets are on the same side of the trade today, and that’s bad news for Wall Street banks’ profits.

The higher dollar will bring some temporary relief for Americans, in lower prices at the pump, and for imported products in stores, for example. Higher rates, however, will put a ton and a half of pressure bearing down on everyone who’s in debt, and that’s most Americans. The idea is probably that by the time this becomes obvious and gets noticed, we’re far enough down the line that there’s no going back. Besides, we could be in full-scale war by then. One or two IS attacks in the west would do.

The higher dollar – certainly in combination with higher rates – will also mean a very precarious situation for the US government, which will have to pay a lot more in borrowing costs, but our leadership seems to think that at least in the short term, they can keep that under control. And then after that, the flood. Maybe the US can start borrowing in yuan, like the UK wants to do?

To reiterate: there is no accident or coincidence here, and neither is it the market reacting to anything. That’s not an option in this multiple choice, since there is no market left. It’s all central banks all the way (like the universe made up of turtles). It’s faith hope and charity, and the greatest of these is the Federal Reserve. Is they didn’t want a higher dollar, there would not be one. Ergo: they’re pushing it higher.

The Bank of England will follow in goose lockstep, while the ECB and Bank of Japan can’t. That’s earthquake and tsunami material. The biggest richest guys and galls will do fine wherever they live. The rest, not so much. Wherever they live . At the Automatic Earth, we’ve been telling you to get out of debt for years, and we reiterate that call today with more urgency. Other than that, it’s wait and see h
ow many export-oriented US jobs will be lost to the surging buckaroo. And how a choice few nations in the northern hemisphere will make through the cold days of winter.

Whatever you do, don’t take this lightly. A major move is afoot.

via Zero Hedge http://ift.tt/1uOej8e Tyler Durden

Having earlier warned that the Ebola epidemic could kill “hundreds of thousands” and is a “priority for US,” President Obama’s concerns about “slowing economic growth in Africa,” are perhaps the most telling statement of the Nobel Peace Prize winners comments this morning. However, as Bloomberg Businessweek’s Brendan Greeley explains in this brief clip, US government bureaucracy stymied efforts to develop and test ZMapp – the potential Ebola treatment.

 

Speaking at the Global Health Security Summit, President Obama stated:

• *OBAMA SAYS EBOLA COULD KILL `HUNDREDS OF THOUSANDS’
• *OBAMA SAYS FIGHTING EBOLA IS `PRIORITY’ FOR U.S.
• *OBAMA SAYS FIGHTING EBOLA MUST BE A GLOBAL PRIORITY
• *OBAMA SAYS EBOLA IS SLOWING ECONOMIC GROWTH IN AFRICA

But as Bloomberg explains…

 

NOTE:

ZMapp is a treatment for Ebola that uses human antibodies to create an immunity to the virus.

The treatment has been given to some Ebola victims and is credited with saving lives.

But there have been no large clinical trials of ZMapp yet.

via Zero Hedge http://ift.tt/1rqUtB2 Tyler Durden

Having earlier warned that the Ebola epidemic could kill “hundreds of thousands” and is a “priority for US,” President Obama’s concerns about “slowing economic growth in Africa,” are perhaps the most telling statement of the Nobel Peace Prize winners comments this morning. However, as Bloomberg Businessweek’s Brendan Greeley explains in this brief clip, US government bureaucracy stymied efforts to develop and test ZMapp – the potential Ebola treatment.

 

Speaking at the Global Health Security Summit, President Obama stated:

• *OBAMA SAYS EBOLA COULD KILL `HUNDREDS OF THOUSANDS’
• *OBAMA SAYS FIGHTING EBOLA IS `PRIORITY’ FOR U.S.
• *OBAMA SAYS FIGHTING EBOLA MUST BE A GLOBAL PRIORITY
• *OBAMA SAYS EBOLA IS SLOWING ECONOMIC GROWTH IN AFRICA

But as Bloomberg explains…

 

NOTE:

ZMapp is a treatment for Ebola that uses human antibodies to create an immunity to the virus.

The treatment has been given to some Ebola victims and is credited with saving lives.

But there have been no large clinical trials of ZMapp yet.

via Zero Hedge http://ift.tt/1rqUtB2 Tyler Durden

Submitted by David Stockman via Contra Corner blog,

Bloomberg has a story today on the faltering of Draghi’s latest scheme to levitate Europe’s somnolent socialist economies by means of a new round of monetary juice called TLTRO – $1.3 trillion in essentially zero cost four-year funding to European banks on the condition that they expand their business loan books. Using anecdotes from Spain, the piece perhaps inadvertently highlights all that is wrong with the entire central bank money printing regime that is now extirpating honest finance nearly everywhere in the world.

On the one hand, the initial round of TLTRO takedowns came in at only $100 billion compared to the $200 billion widely expected. It seems that Spanish banks, like their counterparts elsewhere in Europe, are finding virtually no demand among small and medium businesses for new loans.

Many small and medium-sized businesses are wary of the offers from banks as European Central Bank President Draghi prepares to pump more cash into the financial system to boost prices and spur growth. The reticence in Spain suggests demand for credit may be as much of a problem as the supply.

 

The monthly flow of new loans of as much as 1 million euros for as much as a year — a type of credit typically used by small and medium-sized companies — is still down by two-thirds in Spain from a 2007 peak, according to Bank of Spain data.

On the other hand, Spain’s sovereign debt has rallied to what are truly stupid heights – with the 10-year bond hitting a 2.11% yield yesterday (compared to 7% + just 24 months ago). The explanation for these parallel developments is that the hedge fund speculators in peripheral sovereign debt do not care about actual expansion of the Spanish or euro area economies that is implicit in Draghi’s targeted promotion of business lending (whether healthy and sustainable, or not). They are simply braying that  “T” for targeted LTRO is not enough; they demand outright sovereign debt purchases by the ECB – that is, Bernanke style QE and are quite sure they will get it. That’s why they are front-running the ECB and buying the Spanish bond. It is a patented formula and hedge fund speculators have been riding it to fabulous riches for many years now.

But don’t call these central bankers crooked patsies – they are just dimwitted public servants trying to grind jobs and growth out of the only tool they have. Namely, buying government debt and other existing financial assets in the hopes that the resulting flow of liquidity into the financial markets and the sub-economic price of money and debt will encourage more borrowing and more growth. This is the core axiom of today’s unholy alliance between financial speculators and central bank policy apparatchiks.

Stated differently, today’s Spanish anecdote is just another proof that central banks are pushing on a string; that is, aggressively and incessantly pumping money into financial markets even though the result is wildly inflated asset prices, not expanded business activity. But as is always the case with central bank created financial bubbles, the beneficiaries are happy to pocket the windfalls while the apparatchiks blunder on – pretending not to notice the drastic financial distortions, malinvestments and mis-pricings all around them.

Admittedly, Draghi is one of the dimmer tools in the shed of today’s central banking line-up. But surely even this monetary marionette might possibly wonder about a 2% Spanish bond yield.  After all, virtually nothing has changed there since Spain’s 2012 fiscal and economic crisis. The nation’s unemployment rate is still above 20%, national output is still 7% below where it was six years ago and soaring government debt will soon slice through the 100% of GDP mark.

 

Moreover, Spain is still saddled with the wreckage of a massively bloated development and construction industry, its government is led by corrupt fools who apparently believe their own lies about “recovery”, and its most prosperous province is next for secession voting.

 

 

Needless to say, Draghi and his compatriots in Frankfurt have no clue that they are being played for fools by the carry trade gamblers who have piled into peripheral debt ever since the ECB chairman’s foolish “anything it takes” pronouncement. Yet it is only a matter of time before the growing German political revolt triggers a day or reckoning. When it becomes clear that Germany has vetoed once and for all a massive spree of government debt buying by the ECB, it will be katie-bar-the-door time. The violent scramble of speculators out of Spanish, Italian, Portuguese etc. debt will be a day of infamy for the ECB and today’s destructive central banking regime generally.

But pending that it might also be wondered why the apparatchiks who run our central banks seem to believe that the capacity of households and businesses to carry debt is virtually unlimited—–that there is no such thing as “peak debt” or a law of diminishing returns with respect to the impact of cumulative borrowing on economic activity. Thus, the Bloomberg article notes that the total stock of Spanish business loans (above $1m) is almost 470 billion euros or 25% below the 2008 record of 1.87 trillion euros. The implication is that there is plenty of room for lending to “recover”—-the exact predicate behind Draghi’s program.

But as shown below, that glib assumption simply ignores the history of what has gone before—-namely, that the temporary prosperity leading up to the 2008 financial crisis was a one-time Keynesian parlor trick that used up the available balance sheet headroom and then some. It resulted in a collision with “peak debt” that has fundamentally changed the macro- economic dynamics.

In the case of non-financial business debt, for example, the balance outstanding soared by a factor if 4X in Spain during the 9-year construction and investment boom that preceded the crash. About one-fourth of that unsustainable debt explosion has been liquidated since 2009, but even then business debt has grown at a CAGR of 8.0% since 2000—-a rate significantly higher than Spain 3.5% rate of nominal GD
P growth over that 14-year period.

 

Likewise, household debt nearly doubled as a share of GDP in the 7 year boom before the financial crisis. The household debt ratio has now backed off marginally, but relative to history and the rest of the world it is still unsustainably high. The idea that there is major headroom for a robust recovery of household borrowing is simply wrong. Indeed, Spanish household debt today would amount to $14 trillion on a US scale GDP—a level that is 20% higher than the unsustainable burden still being lugged around by main street households in shop-until-you-drop America.

 

Needless to say, Spain is but a microcosm of a worldwide condition under which maniacal money printers in the central banks are smacking up against peak debt in their domestic economies. As shown in the graph below, outside of Germany the debt disease has been universal. During the eight years after the turn of the century, the leverage ratio for all industrial economies combined ex-Germany—-that is, total public and private credit outstanding relative to GDP—rose from 260% to 390% of GDP. That incremental debt burden in round terms amounted to about $50 trillion.

And despite all the official palaver about how economies have sobered up and begun to delever—-the data make clear that nothing of the kind has happened. Owing to massive expansion of government borrowing and debt ratios since 2009, total credit outstanding has now soared to 430 percent of GDP for the ex-Germany industrialized world. This figure is so far off the historical charts that it could not have even been imagined 15 years ago when worldwide central banks went all-in for money printing.

 

via Zero Hedge http://ift.tt/Ymji62 Tyler Durden

When it comes to the robotization of the workforce – especially those who proclaim they earn less than they are worth – we have grown used to the fast-food-worker being upstaged by technology. However, Murata Manufacturing Co. has unleashed the ultimate threat to every financial TV media's anchor… the world’s first cheerleading robots. With ratings plunging, perhaps it's time for managers to consider the dancing pom-pom carrying machines as replacements to say "off the lows."

 

 

As Wall Street Journal reports,

The robots, which Murata showed off Thursday, balance on balls to move around and wave plastic pompons in the air. Gyro sensors inside the robots allow them to stay upright while moving.

 

…

 

“They are small girls, but they show what electronics can do,” he said.

 

The Murata cheerleaders, which are about 36 centimeters, or 14 inches, tall, are not the only new robots on the scene here. Softbank Corp., the Japanese telecommunications giant, plans to make a humanoid robot called Pepper available in stores next year.

 

While the robots are made of metal and plastic, with hair fashioned from a sponge-like material, the group does have some characteristics that resemble real-life cheerleading squads. There are two backup members, for example.

 

“If one gets sick, we can substitute her,” said Koichi Yoshikawa, a spokesman for Murata.

*  *  *

At a demonstration in Tokyo, a troupe of 10 of the robots moved around in unison to form circles, squares and heart formations, to the bouncy accompaniment of J-pop music.

*  *  *

Of course, in reality this could never work… since the robots would inevitably question their sanity as constant cheerleaders… unlike real world money-honeys.

via Zero Hedge http://ift.tt/1Cu5gOI Tyler Durden

When it comes to the robotization of the workforce – especially those who proclaim they earn less than they are worth – we have grown used to the fast-food-worker being upstaged by technology. However, Murata Manufacturing Co. has unleashed the ultimate threat to every financial TV media's anchor… the world’s first cheerleading robots. With ratings plunging, perhaps it's time for managers to consider the dancing pom-pom carrying machines as replacements to say "off the lows."

 

 

As Wall Street Journal reports,

The robots, which Murata showed off Thursday, balance on balls to move around and wave plastic pompons in the air. Gyro sensors inside the robots allow them to stay upright while moving.

 

…

 

“They are small girls, but they show what electronics can do,” he said.

 

The Murata cheerleaders, which are about 36 centimeters, or 14 inches, tall, are not the only new robots on the scene here. Softbank Corp., the Japanese telecommunications giant, plans to make a humanoid robot called Pepper available in stores next year.

 

While the robots are made of metal and plastic, with hair fashioned from a sponge-like material, the group does have some characteristics that resemble real-life cheerleading squads. There are two backup members, for example.

 

“If one gets sick, we can substitute her,” said Koichi Yoshikawa, a spokesman for Murata.

*  *  *

At a demonstration in Tokyo, a troupe of 10 of the robots moved around in unison to form circles, squares and heart formations, to the bouncy accompaniment of J-pop music.

*  *  *

Of course, in reality this could never work… since the robots would inevitably question their sanity as constant cheerleaders… unlike real world money-honeys.

via Zero Hedge http://ift.tt/1Cu5gOI Tyler Durden

U.S. companies are taking a margin hit as they continue to cut prices amid intense competition, according to Bloomberg Briefs’ Richard Yamarone. In this disinflationary environment, Yamarone notes that consumer-related businesses are raising red flags on the struggling household sector, especially those at the lower end of the income spectrum. Here are 8 CEOs comments to clarify the ‘real’ situation (as consumer confidence somehow hits 7 year highs)…

Hooker Furniture [HOFT] Earnings Call 9/10/14: “We’ve seen a slowdown in orders during the late spring, early summer and that demand was not as robust as we would have hoped given our strong furniture market in April. That trend continued throughout most of the summer, which was characterized by fairly sluggish retail conditions.”

Restoration Hardware [RH] Earnings Call 9/10/14: “As of late, there have been multiple questions, comments and discussions in the press and among the investment community about the continued caution of the customer, the increased promotional environment, and an apparent overall retail funk in the marketplace. Being in the retail business is like being at war.”

Wet Seal [WTSL] Earnings Call 9/10/14: “The competitive space has been highly promotional for quite a while. We’ve done some modifying to our pricing strategy, got high/low. That’s something that I know with that we’re going to be taking a hard look at as the balancing of the pricing shifts, and what we’re doing promotionally the right mix at this point.”

Del Monte Foods [DLM] Earnings Call 9/9/14: “The tough operating environment for consumer packaged goods companies continues. As the consumer struggles with the slow recovery of purchasing power, promotional pricing is being used to drive traffic at retail.”

Burlington Stores Inc. [BURL] Earnings Call 9/9/14: “We feel that 3 percent to 4 percent in the third quarter is a good number relative to our total performance in the first half of the year. And as far as the fourth quarter go, fundamentally, we feel that we’re operating very, very strongly. We just feel it’s better to be cautious this far out from the fourth quarter. So, we felt that 2 percent to 3 percent was the right number overall. We know it’s going to be a highly promotional quarter as it always has been.”

Pep Boys [PBY] Earnings Call 9/9/14: “It is a competitive environment both within the automotive aftermarket and for consumer spending in general. It has been challenging to attract our target customers at a faster rate than we have lost less profitable low price focused customers.”

Campbell Soup [CPB] Earnings Call 9/8/14: “Our industry is now in a period of profound change and challenge and there has been a meaningful decline in the performance of the packaged foods sector. Forces like the economic environment, the transformation of consumer food preferences with regard to health and wellness and their demand for greater transparency, the powerful social and demographic changes, and the rise of e-commerce are all driving significant changes in consumer behavior with respect to food.”

Bebe Stores [BEBE] Earnings Call 9/4/14: “Our overall 35 outlet locations continued to experience negative traffic during the fiscal fourth quarter in the month of July. The promotional environment continues to be a headwind for us, especially at outlet locations.”

J Crew Group Inc. [JCG] Earnings Call 9/4/14: “The environment continues to be challenging. Traffic continues to be a headwind. We’re not immune to that factor. I think connected to that is the promotional environment, which remains in a pronounced, or a heightened situation. So those things are headwinds to our business.”

Source: Bloomberg Briefs

via Zero Hedge http://ift.tt/1DF3Y4U Tyler Durden

U.S. companies are taking a margin hit as they continue to cut prices amid intense competition, according to Bloomberg Briefs’ Richard Yamarone. In this disinflationary environment, Yamarone notes that consumer-related businesses are raising red flags on the struggling household sector, especially those at the lower end of the income spectrum. Here are 8 CEOs comments to clarify the ‘real’ situation (as consumer confidence somehow hits 7 year highs)…

Hooker Furniture [HOFT] Earnings Call 9/10/14: “We’ve seen a slowdown in orders during the late spring, early summer and that demand was not as robust as we would have hoped given our strong furniture market in April. That trend continued throughout most of the summer, which was characterized by fairly sluggish retail conditions.”

Restoration Hardware [RH] Earnings Call 9/10/14: “As of late, there have been multiple questions, comments and discussions in the press and among the investment community about the continued caution of the customer, the increased promotional environment, and an apparent overall retail funk in the marketplace. Being in the retail business is like being at war.”

Wet Seal [WTSL] Earnings Call 9/10/14: “The competitive space has been highly promotional for quite a while. We’ve done some modifying to our pricing strategy, got high/low. That’s something that I know with that we’re going to be taking a hard look at as the balancing of the pricing shifts, and what we’re doing promotionally the right mix at this point.”

Del Monte Foods [DLM] Earnings Call 9/9/14: “The tough operating environment for consumer packaged goods companies continues. As the consumer struggles with the slow recovery of purchasing power, promotional pricing is being used to drive traffic at retail.”

Burlington Stores Inc. [BURL] Earnings Call 9/9/14: “We feel that 3 percent to 4 percent in the third quarter is a good number relative to our total performance in the first half of the year. And as far as the fourth quarter go, fundamentally, we feel that we’re operating very, very strongly. We just feel it’s better to be cautious this far out from the fourth quarter. So, we felt that 2 percent to 3 percent was the right number overall. We know it’s going to be a highly promotional quarter as it always has been.”

Pep Boys [PBY] Earnings Call 9/9/14: “It is a competitive environment both within the automotive aftermarket and for consumer spending in general. It has been challenging to attract our target customers at a faster rate than we have lost less profitable low price focused customers.”

Campbell Soup [CPB] Earnings Call 9/8/14: “Our industry is now in a period of profound change and challenge and there has been a meaningful decline in the performance of the packaged foods sector. Forces like the economic environment, the transformation of consumer food preferences with regard to health and wellness and their demand for greater transparency, the powerful social and demographic changes, and the rise of e-commerce are all driving significant changes in consumer behavior with respect to food.”

Bebe Stores [BEBE] Earnings Call 9/4/14: “Our overall 35 outlet locations continued to experience negative traffic during the fiscal fourth quarter in the month of July. The promotional environment continues to be a headwind for us, especially at outlet locations.”

J Crew Group Inc. [JCG] Earnings Call 9/4/14: “The environment continues to be challenging. Traffic continues to be a headwind. We’re not immune to that factor. I think connected to that is the promotional environment, which remains in a pronounced, or a heightened situation. So those things are headwinds to our business.”

Source: Bloomberg Briefs

via Zero Hedge http://ift.tt/1DF3Y4U Tyler Durden

Submitted by Alhambra Partners' Jeffrey Snider via Contra Corner blog,

Reflections upon the past few years bring out valid criticisms about “being wrong.” I have made no secret that I favor the bearish interpretation of eventually the stock market, but immediately the economy. The erosion and attrition I describe does not look like anything seen before, except the months and years immediately preceding the Great Recession. But that inevitably brings back the rejoinder that there is no such immediate danger right now, as bad as the economy may be there is nothing financially equivalent to the conditions that existed prior to August 9, 2007; with the further inference that a floor exists, economically speaking, today where a trap-door was present then.

What we are really describing, as investors, are the risks to the asset case as it exists now. The optimistic view, which is represented by almost every mainstream economist and policymaker, is really the basis for what they would like to believe is a monetary panacea and thus bull market. The economy is promised to be as a full recovery each and every year, to no ultimate avail. As Stanley Fischer put it recently:

Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back. Indeed, research done by my colleagues at the Federal Reserve comparing previous cases of severe recessions suggests that, even conditional on the depth and duration of the Great Recession and its association with a banking and financial crisis, the recoveries in the advanced economies have been well below average.

Even reading that acknowledgement you realize what the bull case actually is – it is not the recovery or the economy as it exists, it is the promise of one and the plausibility for that promise. Under that paradigm, the market doesn’t care whether orthodox economists are “right” as much as I may be “wrong”, only that there is always next year.

Other places in the world, however, are running out of “next year.” The same assumptions have fueled the trajectory of asset prices in Europe, with much the same vigorous results. Those that have expressed doubts about Europe’s positive numbers and the durability of any recovery were met with the same howls of being “wrong” as stocks rose exponentially (it seemed) alongside the sovereign debt prices of every nation that appeared desperately or even fatally broke only two years ago.

Given what has taken place recently with regard to economic projections and confidence in Europe, does “next year” still hold the same regard as far as stock and bond prices? Again, as in the US, the description and analysis of European economics as it may be outside of the overly optimistic recovery narrative is the difference between seeing a bull market take shape and a monetary-driven asset bubble.

The same can be said of Japan, though the unraveling there has been far quicker than anyone thought (except everyone who was “wrong” doubting Abenomics and the Nikkei).

That is the context into which we provide this analysis. The economy and the market are not the same, as Joe Calhoun regularly points out, but they do bear resemblance over the longer-term. At some point, given any large disparity, there has to be convergence and reckoning. Identifying these divergences not only colors the interpretations of market prices, it allows investors to identify risk.

The greatest risk in investing under these conditions is the Greater Fool problem. Anyone using mainstream economic projections and thus expecting a bull market will, if I and those like me are eventually proven correct, be that Fool. That was what transpired in 2008 as the entire industry moved toward overdrive to convince anyone even thinking about mitigation or risk adjustments that it was “no big deal.” Read through the 2008 FOMC transcripts, as I have done, and get a feel for what was taking place then and how it related to identifying the divergence of the economy with various markets (just as housing had done almost two years earlier, and where the same actors proclaimed the same “don’t worry” nothingness to the imbalance as it imploded in slow motion).

For the mainstream, there was not to be recession in 2008 until it became too obvious to ignore.

The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.

 

Federal Reserve Chairman Ben Bernanke, June 9, 2008.

Bernanke was not alone in that “confidence” as it filtered throughout economic projections and even what brokers and investment advisors recommended and said to their clients. For the most part, retail investors sat out 2008, passively watching as their 401(k)s became 201(k)s as the joke went. They did so because optimism ruled where it did not belong, because the cracks in the dollar system were not apparent outside of the technical complexity upon which the whole mess relied, a condition wholly different from those same faults never being presented.

But 2008 was 2008, and 2014 is a different circumstance. Or is it? We see the same types of cracks appear and widen, dysfunction continues on a global scale and the economy even here never lives up to those promises. So even evaluating on the individual circumstances here leads to the same framework – identifying the possibility that the economy may not be providing the support markets are expecting. Further, the potential trajectory of that may be such that “next year” never actually comes, and at some point “markets” become too aware.

It’s not as if mainstream orthodoxy has proven itself in that regard, regardless of anyone’s feelings about the current case. They have even invented a highly academic cover story to try to explain why we have yet to see “next year”; secular stagnation is both an implicit admission that economists have been wrong of their own accord, but yet, curiously, markets never adjust to that or how that might shade these same projections year after year.

I have serious doubts that the running theme of secular stagnation penetrates the rationalizations that currently anesthetize stock investors, for if they actually understood what it was about there would be very likely be far, far different results.

“I think we do need to try to identify asset bubbles in real time,” Dudley said today at the Bloomberg Markets Most Influential Summit in New York. “You can’t have an effective monetary policy if you have financial instability.”

 

…

 

Chair Janet Yellen acknowledged the risk in July, telling Congress that financial-market valuations appeared stretched in some sectors, including lower-rate corporate debt, and that policy makers were monitoring developments closely.

 

The Fed’s semi-annual Monetary Policy Report to Congress also discussed “substantially stretched” valuations for smaller firms in the social media and biotechnology industries.

The combined account of what was reported above with the idea of secular stagnation is bubbles as far as they eye can see. It also means exactly this kind of disconnect between markets and the economy, one that is opened up on a regular basis as a matter of policy. At Jackson Hole this year, Janet Yellen’s speech was devoted, in part, to the basic idea I paraphrased at the time as:

We had to blow bubbles because that’s the only way to get the economy to grow, and now we have to start thinking about the inevitable consequences of that.

Investments are about two facets, as Doug Terry is fond of reminding: returns which are all very apparent right now, and risk. Risk is defined as keeping those positive returns for more than just numbers on a long ago discarded custodial statement. You can generate all the positive return you want on the upside, but you better have a solid handle on risk of a downside that buries the returns wherever and whenever it may show up. An economy that never lives up to the hype set against rapidly rising prices is simply a highly increased probability of that.

The Fed is practically begging in that direction because they do not want to be Bernanke/Greenspan’s deer in the headlights for a third time. However, that doesn’t mean there won’t be a third time, only that they are on record now trying to “do something” about it. Will markets listen, or is the cloak of rationalizations about “next year” too densely packed?

How you handle the interim period before that time is determined by your own comfort with various analyses of divergences, and whether you feel you can accurately gauge the Greater Fool problem. No matter the desire for return, you better understand the context.

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

Submitted by Alhambra Partners' Jeffrey Snider via Contra Corner blog,

Reflections upon the past few years bring out valid criticisms about “being wrong.” I have made no secret that I favor the bearish interpretation of eventually the stock market, but immediately the economy. The erosion and attrition I describe does not look like anything seen before, except the months and years immediately preceding the Great Recession. But that inevitably brings back the rejoinder that there is no such immediate danger right now, as bad as the economy may be there is nothing financially equivalent to the conditions that existed prior to August 9, 2007; with the further inference that a floor exists, economically speaking, today where a trap-door was present then.

What we are really describing, as investors, are the risks to the asset case as it exists now. The optimistic view, which is represented by almost every mainstream economist and policymaker, is really the basis for what they would like to believe is a monetary panacea and thus bull market. The economy is promised to be as a full recovery each and every year, to no ultimate avail. As Stanley Fischer put it recently:

Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back. Indeed, research done by my colleagues at the Federal Reserve comparing previous cases of severe recessions suggests that, even conditional on the depth and duration of the Great Recession and its association with a banking and financial crisis, the recoveries in the advanced economies have been well below average.

Even reading that acknowledgement you realize what the bull case actually is – it is not the recovery or the economy as it exists, it is the promise of one and the plausibility for that promise. Under that paradigm, the market doesn’t care whether orthodox economists are “right” as much as I may be “wrong”, only that there is always next year.

Other places in the world, however, are running out of “next year.” The same assumptions have fueled the trajectory of asset prices in Europe, with much the same vigorous results. Those that have expressed doubts about Europe’s positive numbers and the durability of any recovery were met with the same howls of being “wrong” as stocks rose exponentially (it seemed) alongside the sovereign debt prices of every nation that appeared desperately or even fatally broke only two years ago.

Given what has taken place recently with regard to economic projections and confidence in Europe, does “next year” still hold the same regard as far as stock and bond prices? Again, as in the US, the description and analysis of European economics as it may be outside of the overly optimistic recovery narrative is the difference between seeing a bull market take shape and a monetary-driven asset bubble.

The same can be said of Japan, though the unraveling there has been far quicker than anyone thought (except everyone who was “wrong” doubting Abenomics and the Nikkei).

That is the context into which we provide this analysis. The economy and the market are not the same, as Joe Calhoun regularly points out, but they do bear resemblance over the longer-term. At some point, given any large disparity, there has to be convergence and reckoning. Identifying these divergences not only colors the interpretations of market prices, it allows investors to identify risk.

The greatest risk in investing under these conditions is the Greater Fool problem. Anyone using mainstream economic projections and thus expecting a bull market will, if I and those like me are eventually proven correct, be that Fool. That was what transpired in 2008 as the entire industry moved toward overdrive to convince anyone even thinking about mitigation or risk adjustments that it was “no big deal.” Read through the 2008 FOMC transcripts, as I have done, and get a feel for what was taking place then and how it related to identifying the divergence of the economy with various markets (just as housing had done almost two years earlier, and where the same actors proclaimed the same “don’t worry” nothingness to the imbalance as it imploded in slow motion).

For the mainstream, there was not to be recession in 2008 until it became too obvious to ignore.

The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.

 

Federal Reserve Chairman Ben Bernanke, June 9, 2008.

Bernanke was not alone in that “confidence” as it filtered throughout economic projections and even what brokers and investment advisors recommended and said to their clients. For the most part, retail investors sat out 2008, passively watching as their 401(k)s became 201(k)s as the joke went. They did so because optimism ruled where it did not belong, because the cracks in the dollar system were not apparent outside of the technical complexity upon which the whole mess relied, a condition wholly different from those same faults never being presented.

But 2008 was 2008, and 2014 is a different circumstance. Or is it? We see the same types of cracks appear and widen, dysfunction continues on a global scale and the economy even here never lives up to those promises. So even evaluating on the individual circumstances here leads to the same framework – identifying the possibility that the economy may not be providing the support markets are expecting. Further, the potential trajectory of that may be such that “next year” never actually comes, and at some point “markets” become too aware.

It’s not as if mainstream orthodoxy has proven itself in that regard, regardless of anyone’s feelings about the current case. They have even invented a highly academic cover story to try to explain why we have yet to see “next year”; secular stagnation is both an implicit admission that economists have been wrong of their own accord, but yet, curiously, markets never adjust to that or how that might shade these same projections year after year.

I have serious doubts that the running theme of secular stagnation penetrates the rationalizations that currently anesthetize stock investors, for if they actually understood what it was about there would be very likely be far, far different results.

“I think we do need to try to identify asset bubbles in real time,” Dudley said today at the Bloomberg Markets Most Influential Summit in New York. “You can’t have an effective monetary policy if you have financial instability.”

 

…

 

Chair Janet Yellen acknowledged the risk in July, telling Congress that financial-market valuations appeared stretched in some sectors, including lower-rate corporate debt, and that policy makers were monitoring developments closely.

 

The Fed’s semi-annual Monetary Policy Report to Congress also discussed “substantially stretched” valuations for smaller firms in the social media and biotechnology industries
.

The combined account of what was reported above with the idea of secular stagnation is bubbles as far as they eye can see. It also means exactly this kind of disconnect between markets and the economy, one that is opened up on a regular basis as a matter of policy. At Jackson Hole this year, Janet Yellen’s speech was devoted, in part, to the basic idea I paraphrased at the time as:

We had to blow bubbles because that’s the only way to get the economy to grow, and now we have to start thinking about the inevitable consequences of that.

Investments are about two facets, as Doug Terry is fond of reminding: returns which are all very apparent right now, and risk. Risk is defined as keeping those positive returns for more than just numbers on a long ago discarded custodial statement. You can generate all the positive return you want on the upside, but you better have a solid handle on risk of a downside that buries the returns wherever and whenever it may show up. An economy that never lives up to the hype set against rapidly rising prices is simply a highly increased probability of that.

The Fed is practically begging in that direction because they do not want to be Bernanke/Greenspan’s deer in the headlights for a third time. However, that doesn’t mean there won’t be a third time, only that they are on record now trying to “do something” about it. Will markets listen, or is the cloak of rationalizations about “next year” too densely packed?

How you handle the interim period before that time is determined by your own comfort with various analyses of divergences, and whether you feel you can accurately gauge the Greater Fool problem. No matter the desire for return, you better understand the context.

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