LeBron James was asked at this week’s NBA media day whether he would join San Francisco 49ers second-string quarterback Colin Kaepernick and other athletes in sitting for the national anthem as a protest against police brutality.
“First of all, I’m all in favor of anyone, athlete or non-athlete being able to express what they believe in in a peaceful manner,” James, a member of the championship-winning Cleveland Cavaliers told the press. “Standing for the national anthem is something I will do, that’s who I am that’s what I believe in, but that doesn’t mean I don’t respect and don’t agree with what Colin Kaepernick is doing.”
James said he didn’t like the negative attention Kaepernick was getting from “some people,” saying his protest was the most peaceful he had seen, and that he didn’t ask anyone else to join him.
Later at the same presser, James was asked about the opening of this year’s ESPY awards, where James was joined by three other basketball players to urge athletes to be more socially active. James told other athletes they had to “go back to our communities, invest our time, our resources, help rebuild them, help strengthen them, help change them.” Last week, the NBA sent a memo to tell players to contact the league and union officials about coming up with ways to create “positive change” in their community.
“We’re not politicians, so we weren’t up there saying America is bad and things of that nature,” James explained at this week’s press conference, “that’s not our position, because America has done so many great things for all of us.” James said his and the other players’ intentions at the ESPYs was to “continue the conversation” and that the league’s memo was a success that came out of that.
In talking about police brutality, James mentioned his own children, and talked about his oldest son, who is 12. “I look at my son being four years removed from driving his own car and being able to leave the house on his own,” James said, “and it’s a scary thought right now to think that if my son gets pulled over, and you tell your kids if you just comply and you just listen to the police they will be respectful and things will work itself out and you see these videos that continue to come out.”
“It’s a scary ass situation,” James continued, “that if my son calls me and says he’s been pulled over, that I’m not that confident that things are going to go well, and my son is going to return home.
James insisted neither he nor anyone else had all the answers, and that’s why he wanted “the conversation to continue to keep going.”
“Because I’m not up here saying that all police are bad, because they’re not, I’m not up here saying that all kids are greats and all adults are great because they’re not,” James explained, “but at the same time all lives do matter and it’s not just black or white, it’s not that, it’s everyone, it’s tough being a parent right now, when you have a pre-teen, but the conversation is continued from the ESPYs and that’s definitely a good thing.”
In December of 2014, LeBron James joined several other NBA players in wearing “I can’t breathe” t-shirts to protest the killing of Eric Garner by police in New York City.
Whether you think there has been a housing “recovery” or not is a matter of perspective. Sales are indeed up 117% since the 2010 low, but that low was literally the worst level in the history of this data (since 1963) as a percentage of population growth. It was the Great Depression of Housing, the only possible result of the greatest housing bubble since the 1920s, if not in history. While sales have rebounded since that low, the current sales rate has barely recovered to the levels seen at the recession lows of 1991 and 1982. This rebound is little more than a dead cat bounce after 6 years of recovery, and now it may be faltering.
Mainstream economists give the Fed credit for stimulating this “recovery.” But, in fact the Fed has created a Catch 22 with no way out. The only thing the Fed has stimulated is house price inflation while destroying interest income on savings for millions of ordinary Americans, especially former middle class retirees. With mortgage rates pushed down to all time lows, house prices have consequently inflated at a rate that offsets the buyer’s savings in the interest component of the mortgage. Meanwhile American savers have lost not only massive purchasing power, but also have been forced to consume principal. The Fed has not stimulated sales but it has succeeded in transferring wealth away from those who can least afford it to those who least deserve it.
Had mortgage rates stopped falling at higher levels, house price inflation would have been stunted. More of a buyer’s mortgage payment would have been apportioned toward the higher interest component of the payment and less toward inflating the purchase price.
But the Fed got the result it intended. It wanted to inflate prices to save the banks from their stupidity and criminality. Decisions were made at the highest levels of the Fed and the Federal Government to not only let the banks off the hook, but to rescue them. The only way to do that was to forego prosecution of massive criminal wrongdoing, and to engineer price inflation, so that the criminal perpetrators of the fraud that drove the Great Bubble would be free to re-offend.
The Fed’s claim of trying to help the typical consumer is hogwash. The benefits of the low interest rate policy have flowed only to the upper income strata. In our monthly updates of our “Thanks Fed For Helping the Average Guy” we see that the chance of the “average guy” to buy a new home remains virtually nil. Not only has there been no recovery in homes priced under $200,000, sales in that price range have essentially disappeared in spite of the world’s major central banks pushing mortgage rates down. Builders no longer have any interest in producing product in that price range because demand has weakened so much at that level. People at the reported median US household income simply can’t afford to buy houses regardless of the fact that they may be borderline qualified.
Prior to the housing crash, most new homes sold were in the under $200,000 price range. Since 2007, mortgage rates have been cut nearly in half. Yet production and sales of homes in the under $200,000 range have continued falling, now down 61% since 2007.
Builders have shifted their efforts to the $200-$400k range, where they still have some margin, and can move enough inventory to earn a profit. The higher the price of the home, the more profitable it is for a builder. Unfortunately, homes priced above $230,000 are beyond the reach of households earning the reported median household income of $56,000, a figure which itself we believe is overstated. Because of central bank driven housing inflation, and suppression of household income growth (also partly attributable to ZIRP) home ownership is increasingly out of reach for an ever growing percentage of US households
If monetary policy were helping the housing market, the rate of homeownership should be at least stable. Instead, as mortgage rates have been consistently suppressed since 2007, homeownership has fallen concurrently.
The problem is that as the Fed and its cohort central banks have been busy pushing down long term interest rates, that has pushed house prices up so fast that there has been no increase in affordability.
During and after the 2007-2010 crash, homeownership fell due to the massive increase in foreclosures. The foreclosure crisis began to recede in 2012. Since then the drop in the homeownership rate has not been because of people losing their homes, it has been because fewer people can afford to purchase, even in spite of the world’s central banks subsidizing buyers with absurdly low interest rates. As we’ve shown, the subsidy is self defeating. It does not benefit buyers.
Meanwhile, the only US regions that have seen any rebound at all in new home sales have been the West and Southwest. The Northeast and the Midwest remain absolutely dead in the water. In the Northeast, sales are down 60% relative to the 1991 recession low. Let that sink in for a moment–not versus the bubble peak, but since the low of a recession 25 years ago, when the US population was 25% less than today. Sales in the Midwest are down 12.5% since the 1991 low.
Lest you think that the West is going great guns, its sales are only up 8% since 1991. That is in spite of US population growing by 25% in those 25 years. The West has grown even faster– 45% since 1991.
The issue in the West is an ever growing affordability crisis. It too is largely driven by the central bank interest rate subsidy of the past 8 years. It has reignited a massive housing bubble throughout California, the nation’s largest housing market. Tiny 3 bedroom bungalows in the suburbs of San Francisco now go for more than a million dollars. Absurd.
Finally, the South has seen a surge of 35% in new home sales since 1991. But that’s is less than half the population growth of 72%. A long term demographic-geographic shift drives growth in the South. This trend has gone on for decades. Fed policy has nothing to do with it, other than to inflate prices.
Notably, even after recovering from the 2007-09 crash, all regions remain well below the levels of the 2001 recession low.
The argument that the Fed policy of ZIRP and suppression of long term interest rates through QE bond purchases has stimulated housing simply does not hold water. It has stimulated house price inflation, and that price inflation has fully offset the cost-reduction effect of the interest subsidy to home borrowers. At the same time Fed policy has cost millions of savers trillions in interest income that could have boosted not only consumption, but also cash available for down payments on home purchases. The idea that low interest rates stimulate the economy by stimulating housing is The Big Lie.
The Fed has created a situation where the housing industry is so dependant on the massive interest rate subsidy that any uptick in rates is likely to cause a cataclysm. The Fed and its cohorts are responsible for this mess. They have left themselves, and us, with no way out.
As was leaked earlier today by Reuters, which reported that OPEC could announce an output-freeze deal on Wednesday in Algeria, although full details are unlikely to be firmed up before a formal meeting of the Organization of the Petroleum Exporting Countries in November, moments ago Reuters blasted that this is precisely what OPEC has decided at its Algiers meeting, when it announced that a deal to limit oil production has been reached, however the execution won’t take place for another two months.
OPEC REACHES DEAL TO LIMIT OIL PRODUCTION, EXECUTION IN NOV – OPEC SOURCE
Oil, as expected on this latest attempt to spark a headline driven buying frenzy, has surged on the news, and was up 4% at last check, some $1.75 higher, trading at $46.40 even though it remains unclear just how – if at all – a “supply freeze” takes place when practically all members who are not producing at capacity such as Iran and Nigeria will be granted an exemption.
It appears for once, the word (of some politicians) is mightier than the pen (of Obama). The White House has lashed out at The Senate's veto override, which Josh Earnest described as "the single most embarrassing thing that the United States Senate has done." As The Hill reports, in the most overwhelming vote (97-1) since 1983, President Obama's lame-duckedness was exposed and that enraged Obama (and his Saudi friends' money).
As The Hill detailed, Earnest’s unusually harsh words are an effort to shame lawmakers for their support for the Justice Against Sponsors of Terrorism Act (JASTA), which passed unanimously through both chambers earlier this year. For weeks, White House officials have accused members of Congress of failing to publicly express the reservations about the measure that they have spoken about privately. Earnest seized on comments by made by Senate Foreign Relations Committee Chairman Bob Corker (R-Tenn.), who told reporters that Judiciary Committee members didn’t pay much attention to the legislation until it came to the floor. Corker suggested senators backed the measure because no one wanted to break with 9/11 victims and their families who support the measure.
“To have members of the United States Senate only recently informed of the negative impact of this bill on our service members and our our diplomats is in itself embarrassing,” Earnest said.
“For those senators then to move forward on overriding the president’s veto that would prevent those negative consequences is an abdication of their basic responsibilities of representatives of the American people.”
Senate Minority Leader Harry Reid (D-Nev.) was the sole vote to sustain Obama’s veto.
Not a single Democrat came to the Senate floor before the vote to argue in favor of Obama’s position. Obama expressed grave concerns about the measure in his veto message last Friday, warning JASTA would improperly involve U.S. courts in national security matters, including whether foreign governments should be considered state sponsors of terror. He also said it would undermine the concept of sovereign immunity, putting American diplomats, military service members and government assets abroad at risk of legal action, should other countries pass reciprocal laws.
The White House is also wary of angering the Saudi government, which strongly opposes the bill. The U.S.-Saudi alliance has been tested under Obama’s watch, especially by last year’s nuclear deal with Iran. But the president’s strong objections fell on deaf ears in Congress, though Obama personally convinced Reid to sustain his veto after a phone conversation and letter. But no other lawmakers were swayed by appeals from the president, his staff or representatives of the Saudi government, which lobbied against the bill.
Corker told reporters that Obama put virtually no effort into persuading lawmakers to sustain his veto.
“Hopefully, these senators are going to have to answer their own conscience and their constituents as they account for their actions today,” Earnest said.
The head of HSBC’s Technical Analysis group just issued a major warning.
Unless the markets can take out their September highs, we could very well see a repeat of the 1987 Crash.
Murray Gunn is head of technical analysis for HSBC. In a recent client note, he pointed out the Head and Shoulders top pattern that presaged the 1987 Crash.
In its simplest forms, the Dow Jones Industrial Average formed a Head and Shoulders top when it violated its neckline. It then had a failed attempt to reclaim the neckline, which resulted in the market rolling over into the famous Crash.
Gunn notes that the Dow is forming a similar pattern today. He also notes that momentum is waning, and Elliot Wave analysis indicates a 1987-type Crash could indeed occur.
The markets are on thin ice. Whether we're heading for just another correction or something BIGGER remains to be seen.
For certain, we have the makings of a REAL disaster with the situation in Deutsche Bank
If you've yet to take action to prepare for another Crisis, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.
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It is becoming very clear that the Deutsche Bank debacle is getting very serious. How do we know? Simple – everyone is denying everything. Overnight DB CEO Cryan denied any need to raise capital or need a bailout; this morning ECB's Draghi denied low rates were responsible, and denied The IMF's statement the bank is systemically important; and now IMF's Lagarde is denying any need for government intervention.
Mario Draghi said the financial industry must stop blaming the actions of central banks for their problems and focus on fixing internal management and risk failings.
“Many banks have problems that don’t have primarily to do with the low level of interest rates but possibly with other reasons,” the European Central Bank president said after a meeting with German lawmakers in Berlin on Wednesday.
He cited business models and risk management and said this was “generally acknowledged” by those at the talks.
As Bloomberg reports, when asked about accusations by some in the financial industry that the ECB is to blame for some banks’ woes, Draghi said he didn’t share that view.
“If a bank represents a systemic threat for the euro zone, this cannot be because of low interest rates,” he said. “It has to do with other reasons.”
While correlation is not causation – as everyone says when trying to prove a false positive – in this case we can't help but think Draghi's handiwork certainly didn't help…
Then IMF Chief Christine Lagarde piped in, telling CNBC that…
"Deutsche Bank is a systemic important player in the global financial system.
But, is on a solid base currently, and we are not at a stage in which I see the need for a government intervention."
So to clarify:
DRAGHI: DEUTSCHE BANK DOES NOT POSE SYSTEMIC RISK
LAGARDE: DEUTSCHE BANK SYSTEMICALLY IMPORTANT
Yeah, you're right, its probably nothing…
So, as we asked overenight, who blinks first? The IMF – "told you so" dance. The ECB – knowing the collateral chains that will snap. The Bundesbank – knowing their entire banking system is at risk. The German government – knowing it's over for them if DB depositors have to take a haircut… Or Brussels – who know the entire EU plan is teetering is done if anything but the 'rules' are applied to Deutsche. For now, there is one thing for sure – the market will press for one of these players to be forced to make decision.
Sooner or later everyone sits down to a banquet of consequences.
~ Robert Louis Stevenson
Last week, the Federal Reserve decided to keep US interest rates unchanged, marking its 96th month of life at the zero bound. Apparently, for all of its "data dependence", the Fed feels the economy could still benefit from *just* a little more of its ZIRP happy juice.
But as anyone with a little common sense will tell you,More is not always better. It's quite possible to have too much of a good thing.
And in its pursuit to kick the can for a little longer, the Fed has crossed a dangerous line. Dangerous not just to the health of our market economy (that line was crossed a long time ago); but to its own existence. A central bank's authority is based on faith in its power to effect its mandate. Last week's decision was so toothlessly passive that even the Fed's cheerleaders are beginning to question if it has any clue for how to escape from the corner it has painted itself into.
The Fed and its central banking brethren (most notably the European Central Bank, Bank of Japan, Bank of England and Bank of China), have decided to sacrifice investing for tomorrow (namely savings, and capital expenditure in productive enterprise) in favor of higher prices today for financial assets. By keeping interest rates historically low — and increasingly negative — around the world, they have pushed capital much farther out the risk curve than it deserves to be. All while adding trillions of more debt into an already dangerously over-leveraged economy, and lavishly rewarding the rich elite at the expense of everyone else.
As Stevenson wrote, sooner or later, the banquet of consequences must be supped on. And for the Fed, the dinner bell is ringing.
The Law Of Diminishing Marginal Utility
Last month, I issued a report titled The Marginal Buyer Holds The Pin That Pops Every Asset Bubble which explained how prices are set "at the margin" (meaning: above what the second-highest bidder is willing to pay). It's a very useful concept for understanding how prices rise to unsustainable heights during an asset bubble era such as the one we're in now, and how they can fall much more quickly than most expect when a bubble bursts.
Building further on this viewpoint at the margin, I want to examine the concept of marginal utility. Marginal utility is essentially how much benefit you derive from receiving more of something, usually one more additional unit of a good or service.
On the surface, most of us think: If a little is good, then even more is better, right?
Well, not always. In fact, in most cases not.
As this hokey short video from Investopedia shows, the satisfaction we gain from each additional unit diminishes, until a switchover point is reached at which each new unit is no longer experienced as a benefit, but as a cost:
The pizza example from the video is not dissimilar from the central banking cartel's intervention efforts over the past decade. With each additional month at historically low interest rates, the goosing effects of ZIRP/NIRP policy to the economy diminishes. Despite a planetary coordinated effort to dish out bigger and bigger pizza slices of monetary stimulus, the global economy can't manage to grow any faster than its current stumbling pace. World central bank balance sheets have now tripled in size since 2008, and yet global GDP growth has remained stuck at 2.5% for years:
Note the red line in the above chart. The liquidity efforts of the central banking cartel have flooded the world with $trillions and $trillions of debt incremental to the massive pile that existed before the 2008 credit crisis. (Remember, all central bank-issued money is loaned into existence.) As if we needed more: for those who haven't been paying attention, the world now has over $60 trillion more debt than it did at the end of 2007 (likely much more, as the data below is from Q4 2014):
Continued economic growth is requiring more and more debt. In fact, despite the recent jump in debt over the past few years, growth in world trade is petering out:
WTO cuts world trade growth forecast to 1.7% in 2016
World trade will this year grow at the slowest pace since the global financial crisis, a development that should serve as a “wake-up call” given rising antiglobalization sentiment, the World Trade Organization warned Tuesday.
The Geneva-based body responsible for enforcing the rules that govern global trade cut its forecast for the growth of exports and imports this year and next, and now foresees an increase of just 1.7% in 2016 and as little as 1.8% in 2017, having projected rises of 2.8% and 3.6%, respectively, in April.
The WTO joined other international bodies—such as the Organization for Economic Cooperation and Development—in warning a slowdown in trade could weaken longer-term economic growth.
Simply put: We have reached the switchover point at which the costs of additional monetary stimulus exceed any benefits.
It's at moments like this when the credit-engorged system can no longer be sustained and breakages occur. To put it more visually, the next unit of stimulus is likely to operate as Monty Python's "wafer-thin mint":
Yellen Rings The Dinner Bell
Fundamentals don't pop bubble markets, shifting sentiment does. Bubbles breed off of confidence: confidence that prices will be even better tomorrow than they are today.
For nearly a decade now, the Fed has cultivated an aura of omnipotence; that it has the power to boost economic growth and reduce unemployment — while simultaneously 'creating' wealth by elevating the prices of stocks, bonds and real estate. Speculators have loved the security promised by Greenspan/Bernanke/Yellen "put", trusting that the Fed is working hard to keep the party rollicking. And they've been rewarded for their faith: percentage gains across nearly all financial asset classes between 2010-2014 were tremendous.
But since then, things have flattened out. Price appreciation has become harder to come by and the price action has been more choppy. Our central banking high priests and priestesses perform more rain dances, but the rains don't fall. Despite nearly $200 billion in stimulus being pumped into the global economy each month by the ECB and BOJ alone, growth remains anemic.
Given this failure to boost growth, the natives are growing worried. So it's little surprise that all eyes were on Janet Yellen last week, as market investors hoped to receive signs that the Fed had a winning card to play. Yellen's decision to stand pat (really more of a 'non-decision' to do anything) gave no such signs. More important, it appears to have stretched the Fed's credulity to the point where market analysts — even its biggest cheerleaders — are beginning to voice doubts that the Fed has any control left over the situation anymore.
"This is a disaster in terms of credibility," says Dan North, chief U.S. economist at Euler Hermes. Investors "don't think there's any credibility in what [Fed officials] say because there's too many voices." (CNNMoney)
"Credibility is out the window and forward guidance is dead," said Michael Ingram, a market analyst with CMC Markets, based in London. (TheStreet.com)
After the Federal Reserve decided to leave interest rates unchanged, bond guru Bill Gross told CNBC he was barely able to speak.
"I'm choked with emotion and hardly able to speak," the portfolio manager at Janus Capital Management said in an interview with CNBC's "Power Lunch."
"After hawkish talk at Jackson Hole from [Fed Chair] Yellen and [Vice Chair] Stan Fischer, who even said there'd be two hikes in 2016, they've chosen to defer once more a necessary hike to normalize short-term interest rates and provide savers, in my view, with at least a bit of thin gruel to work with to provide for education, retirement and health-care needs."
He believes the contradiction between what Fed officials have said leading up to the meeting and the outcome of the gathering is leaving investors "very confused." (CNBC)
More and more people are beginning to feel that perhaps our position here at Peak Prosperity has indeed been the correct one all along. That, by intervening with loose monetary policy to prevent the markets from correcting naturally, the Fed has re-blown a series of asset bubbles that have concentrated wealth in the pockets of the top 0.1% at the expense of nearly everybody else, particularly savers and those on fixed incomes. In doing so, it made the financial markets addicted to its cheap and voluminous liquidity, to the point where they threaten to nose-dive every time the Fed or its collective brethren attempt to tighten the stimulus spigot.
Yellen and company have reached the point where they are damned if they tighten, and damned if they don't. So their best play is to simply stall for time — which, in retrospect, looks like pretty much what the Fed has been doing since the end of QE3 in late 2014.
So the Fed can't afford to raise rates. But by not doing so, it's now in violation of the very "data dependent" rules it claims publicly to be bound by. By its own admission, the unemployment rate is now extremely low, "economic activity has picked up from the modest pace seen in the first half of this year", and household income has jumped. Yet the Fed is still triaging the economy with life support measures. Something is clearly amiss in the gap between the confidence the Fed projects and the desperation of its actual measures.
The dinner bell for the Fed's banquet of consequences has been rung. It's credibility is becoming increasingly stretched among mainstream audiences, and should it actually raise rates in December (forget about November, I don't think there's anyone left who still believes the Fed is not politicized), it will be vilified by the ensuing market drop. Attacks to its reputation from fringe voices like Ron Paul were easy to deflect, but public shamings on the worldwide stage of the US Presidential election from the Republican nominee are much more threatening:
The Banquet Of Consequences
So, the big question of course is: How will this all end?
In his excellent report last week, Hell To Pay, Chris laid out how once faith in central banks is lost, their power to delay the deflationary day of reckoning goes with it. The stupendous amount of debt they have helped heap onto the financial system since 2008 will start going into default and the only question that will matter is: Who is going to eat the losses?
The daisy chain of bubbles in stocks, real estate, and the mother of them all — the bond market — will pop, adding additional losses to the growing bloodbath.
All this will weigh on the already-sluggish growth in the economy, sending us into deep capital-R Recession, or worse.
So, if you haven't done so already, read his report (it's free). And strongly consider taking the precautionary steps he advises, lest you be one of the unlucky forced to choke down the Fed-created losses at the coming Banquet of Consequences.
Sooner or later everyone sits down to a banquet of consequences.
~ Robert Louis Stevenson
Last week, the Federal Reserve decided to keep US interest rates unchanged, marking its 96th month of life at the zero bound. Apparently, for all of its "data dependence", the Fed feels the economy could still benefit from *just* a little more of its ZIRP happy juice.
But as anyone with a little common sense will tell you,More is not always better. It's quite possible to have too much of a good thing.
And in its pursuit to kick the can for a little longer, the Fed has crossed a dangerous line. Dangerous not just to the health of our market economy (that line was crossed a long time ago); but to its own existence. A central bank's authority is based on faith in its power to effect its mandate. Last week's decision was so toothlessly passive that even the Fed's cheerleaders are beginning to question if it has any clue for how to escape from the corner it has painted itself into.
The Fed and its central banking brethren (most notably the European Central Bank, Bank of Japan, Bank of England and Bank of China), have decided to sacrifice investing for tomorrow (namely savings, and capital expenditure in productive enterprise) in favor of higher prices today for financial assets. By keeping interest rates historically low — and increasingly negative — around the world, they have pushed capital much farther out the risk curve than it deserves to be. All while adding trillions of more debt into an already dangerously over-leveraged economy, and lavishly rewarding the rich elite at the expense of everyone else.
As Stevenson wrote, sooner or later, the banquet of consequences must be supped on. And for the Fed, the dinner bell is ringing.
The Law Of Diminishing Marginal Utility
Last month, I issued a report titled The Marginal Buyer Holds The Pin That Pops Every Asset Bubble which explained how prices are set "at the margin" (meaning: above what the second-highest bidder is willing to pay). It's a very useful concept for understanding how prices rise to unsustainable heights during an asset bubble era such as the one we're in now, and how they can fall much more quickly than most expect when a bubble bursts.
Building further on this viewpoint at the margin, I want to examine the concept of marginal utility. Marginal utility is essentially how much benefit you derive from receiving more of something, usually one more additional unit of a good or service.
On the surface, most of us think: If a little is good, then even more is better, right?
Well, not always. In fact, in most cases not.
As this hokey short video from Investopedia shows, the satisfaction we gain from each additional unit diminishes, until a switchover point is reached at which each new unit is no longer experienced as a benefit, but as a cost:
The pizza example from the video is not dissimilar from the central banking cartel's intervention efforts over the past decade. With each additional month at historically low interest rates, the goosing effects of ZIRP/NIRP policy to the economy diminishes. Despite a planetary coordinated effort to dish out bigger and bigger pizza slices of monetary stimulus, the global economy can't manage to grow any faster than its current stumbling pace. World central bank balance sheets have now tripled in size since 2008, and yet global GDP growth has remained stuck at 2.5% for years:
Note the red line in the above chart. The liquidity efforts of the central banking cartel have flooded the world with $trillions and $trillions of debt incremental to the massive pile that existed before the 2008 credit crisis. (Remember, all central bank-issued money is loaned into existence.) As if we needed more: for those who haven't been paying attention, the world now has over $60 trillion more debt than it did at the end of 2007 (likely much more, as the data below is from Q4 2014):
Continued economic growth is requiring more and more debt. In fact, despite the recent jump in debt over the past few years, growth in world trade is petering out:
WTO cuts world trade growth forecast to 1.7% in 2016
World trade will this year grow at the slowest pace since the global financial crisis, a development that should serve as a “wake-up call” given rising antiglobalization sentiment, the World Trade Organization warned Tuesday.
The Geneva-based body responsible for enforcing the rules that govern global trade cut its forecast for the growth of exports and imports this year and next, and now foresees an increase of just 1.7% in 2016 and as little as 1.8% in 2017, having projected rises of 2.8% and 3.6%, respectively, in April.
The WTO joined other international bodies—such as the Organization for Economic Cooperation and Development—in warning a slowdown in trade could weaken longer-term economic growth.
Simply put: We have reached the switchover point at which the costs of additional monetary stimulus exceed any benefits.
It's at moments like this when the credit-engorged system can no longer be sustained and breakages occur. To put it more visually, the next unit of stimulus is likely to operate as Monty Python's "wafer-thin mint":
Yellen Rings The Dinner Bell
Fundamentals don't pop bubble markets, shifting sentiment does. Bubbles breed off of confidence: confidence that prices will be even better tomorrow than they are today.
For nearly a decade now, the Fed has cultivated an aura of omnipotence; that it has the power to boost economic growth and reduce unemployment — while simultaneously 'creating' wealth by elevating the prices of stocks, bonds and real estate. Speculators have loved the security promised by Greenspan/Bernanke/Yellen "put", trusting that the Fed is working hard to keep the party rollicking. And they've been rewarded for their faith: percentage gains across nearly all financial asset classes between 2010-2014 were tremendous.
But since then, things have flattened out. Price appreciation has become harder to come by and the price action has been more choppy. Our central banking high priests and priestesses perform more rain dances, but the rains don't fall. Despite nearly $200 billion in stimulus being pumped into the global economy each month by the ECB and BOJ alone, growth remains anemic.
Given this failure to boost growth, the natives are growing worried. So it's little surprise that all eyes were on Janet Yellen last week, as market investors hoped to receive signs that the Fed had a winning card to play. Yellen's decision to stand pat (really more of a 'non-decision' to do anything) gave no such signs. More important, it appears to have stretched the Fed's credulity to the point where market analysts — even its biggest cheerleaders — are beginning to voice doubts that the Fed has any control left over the situation anymore.
"This is a disaster in terms of credibility," says Dan North, chief U.S. economist at Euler Hermes. Investors "don't think there's any credibility in what [Fed officials] say because there's too many voices." (CNNMoney)
"Credibility is out the window and forward guidance is dead," said Michael Ingram, a market analyst with CMC Markets, based in London. (TheStreet.com)
After the Federal Reserve decided to leave interest rates unchanged, bond guru Bill Gross told CNBC he was barely able to speak.
"I'm choked with emotion and hardly able to speak," the portfolio manager at Janus Capital Management said in an interview with CNBC's "Power Lunch."
"After hawkish talk at Jackson Hole from [Fed Chair] Yellen and [Vice Chair] Stan Fischer, who even said there'd be two hikes in 2016, they've chosen to defer once more a necessary hike to normalize short-term interest rates and provide savers, in my view, with at least a bit of thin gruel to work with to provide for education, retirement and health-care needs."
He believes the contradiction between what Fed officials have said leading up to the meeting and the outcome of the gathering is leaving investors "very confused." (CNBC)
More and more people are beginning to feel that perhaps our position here at Peak Prosperity has indeed been the correct one all along. That, by intervening with loose monetary policy to prevent the markets from correcting naturally, the Fed has re-blown a series of asset bubbles that have concentrated wealth in the pockets of the top 0.1% at the expense of nearly everybody else, particularly savers and those on fixed incomes. In doing so, it made the financial markets addicted to its cheap and voluminous liquidity, to the point where they threaten to nose-dive every time the Fed or its collective brethren attempt to tighten the stimulus spigot.
Yellen and company have reached the point where they are damned if they tighten, and damned if they don't. So their best play is to simply stall for time — which, in retrospect, looks like pretty much what the Fed has been doing since the end of QE3 in late 2014.
So the Fed can't afford to raise rates. But by not doing so, it's now in violation of the very "data dependent" rules it claims publicly to be bound by. By its own admission, the unemployment rate is now extremely low, "economic activity has picked up from the modest pace seen in the first half of this year", and household income has jumped. Yet the Fed is still triaging the economy with life support measures. Something is clearly amiss in the gap between the confidence the Fed projects and the desperation of its actual measures.
The dinner bell for the Fed's banquet of consequences has been rung. It's credibility is becoming increasingly stretched among mainstream audiences, and should it actually raise rates in December (forget about November, I don't think there's anyone left who still believes the Fed is not politicized), it will be vilified by the ensuing market drop. Attacks to its reputation from fringe voices like Ron Paul were easy to deflect, but public shamings on the worldwide stage of the US Presidential election from the Republican nominee are much more threatening:
The Banquet Of Consequences
So, the big question of course is: How will this all end?
In his excellent report last week, Hell To Pay, Chris laid out how once faith in central banks is lost, their power to delay the deflationary day of reckoning goes with it. The stupendous amount of debt they have helped heap onto the financial system since 2008 will start going into default and the only question that will matter is: Who is going to eat the losses?
The daisy chain of bubbles in stocks, real estate, and the mother of them all — the bond market — will pop, adding additional losses to the growing bloodbath.
All this will weigh on the already-sluggish growth in the economy, sending us into deep capital-R Recession, or worse.
So, if you haven't done so already, read his report (it's free). And strongly consider taking the precautionary steps he advises, lest you be one of the unlucky forced to choke down the Fed-created losses at the coming Banquet of Consequences.
Discussing the present and future of the embattled hedge fund industry, Tiger Management’s Julian Robertson – one of the most prominent names in the field – said that hedge funds are facing “the most difficult time I’ve ever seen in the business” his investing career (observing that “there are a lot of people squeezing shorts”), and warned that the days of charging hefty fees may be over.
““That type of business hasn’t worked lately, and it’s a tough business,” Robertson, 84, said Tuesday on Bloomberg Surveillance in New York. “It’s tougher to be a hedge fund investor than ever before.”
Incidentally, the current debacle facing the hedge fund space, is something we have been warning about since 2012, when we predicted that as a result of central banks’ having taken over the role of the market’s Chief Risk Officer, there is implicitly no more downside risk, and thus no need to hedge; alternatively once central banks do lose control, no extent of hedges will compensate for the rout that would occur, which coupled with counterparty failure, would mean failure to satisfy obligations made under short trades.
Sevaral years later, Julian Robertson agrees with this assessment, saying that ultra-low interest rates and swollen stock-market valuations are crimping returns for the managers, whose portfolios are designed to outperform during a downturn. The problem: with central banks injecting $2.5 trillion in liquidity each year, there is no downturn. As a result, the $2.9 trillion industry, has underperformed the S&P 500 index every year since 2008.
So what could save hedge funds? The simple answer: an end to the financial repression, bubble blowing and market manipulation that central bankers have unleashed, but it wouldn’t only benefit hedge funds:
“High interest rates are going to encourage savings, and I think we desperately need savings. Take a widow: they don’t know what to do with the money. There is no way they can do anything with it unless they go into stocks. I think forced equity investing creates the bubble.”
When asked who do you blame for this mess, the legendary hedge fund investor had one name: Janet Yellen, who Robertson says “is unwilling to see the American public taking pain at all and because of that I think she is creating a serious bubble where serious pain is going to come.”
What happens then: “If we have that bubble burst, you’re not going to make any money in the stock market unless you’re short and unless you’re in some sort of hedge fund.”
The billionaire also warned young job-seekers to avoid industries that have become overly popular like hedge funds, although he admitted that seeding a newer generation of managers – which he’s done since opening his family office – is still one of his favorite things to do. “I still think that the good people will do well,” Robertson said.
On a tangent, Robertson had a brief chat about the presidential election, and had kind words for Republican nominee Donald Trump but said he won’t be voting for him. “I know Donald and I like Donald, and I really respect the Wollman Rink, which he’s put back in Central Park,” Robertson said, referring to the New York ice-skating rink Trump renovated in the 1980s. “But I’m out of that race. I’m going to vote for the former governor of New Mexico and the former governor of Massachusetts.”