Tag: news

Albert Edwards is angry, and understandably so: almost exactly two weeks after warning readers to “sell everything and run for your lives” and the market was on the verge of its first correction in years, several powerful verbal interventions by central banks from the Fed, to the BOJ to the ECB have staged yet another massive rebound which has nearly wiped out all the October losses.

Central-planning aside (and ask how much the USSR would have wished for central planning to indeed have been “aside”) we share his frustrations, almost to the point where we would reiterate word for word Edwards’ furious outburst, as follows: “Simply put, the central banks for all their huffing and puffing cannot eliminate the business cycle. And they should have realised after the 2008 Great Recession that the longer they suppress volatility, both economic and market, the greater the subsequent crash. Will these morons ever learn?“

Obviously, they will never will because their very entire existence is based on the assumption that what they do can impact the business cycle when all it does is merely delay the inevitable. In this case, a recession whose arrival will be so violent, it will crush not only US stocks, but the overall economy, which has for the past 6 years existed purely on the Fed’s CTRL-P fumes. Fumes, which by the looks of things, will evaporate at just the worst possible moment: just when half of the world’s entire growth in 2015 is expected to come from the US (the other half from China).

So what is it that has peeved Edwards so much about the latest mispricing of, well, everything by the Mandarins of Marriner Eccles:

The bottom line is that there is far too much over-confidence in the US recovery. Fragile and vulnerable in itself, the US recovery now battles against the rest of the world, which like a horror movie is dragging it down into a hellish Ice Age underworld. The problem is that at, these stratospheric valuations, the market does not need to suffer an ACTUAL recession to see a crash. Like October 1987, just the fear of recession will be enough to trigger a massive market move.

Specifically, Edwards looks at implied inflation expectations – remember, this is critical for a recovery in a Keynesian context – and finds none.

The problem is that most risk assets, and especially equities and corporate bonds, are very expensive and priced for a long cycle. Meanwhile, this recovery has failed to generate any cyclical upward pressure to inflation – indeed quite the reverse. The global economy resembles a knackered old V8 engine which is now only firing on one cylinder (US). Hence, any data suggesting that the US economy is now also flagging were always likely to cause a meltdown as investors feared the imminent arrival of Japanese-style outright deflation. We note with interest that US 5-year inflation expectations in 5 years’ time have not fallen anything like as quickly as 5y expectations (see chart below). This suggests to me a continued misplaced market (over)-confidence about central banks’ ability to control events

 

Sure enough, the events from last week showed just how fast and how violent such a move would be, at least until the central bankers stepped in once again, and with chatter of QE4, made sure bad news if good news again, if only for a few weeks. However, with just one more POMO left, if only in theory, the fears of how the global economy will fare without the Fed’s monetary tailwind propping up everything are going to resurface very fast.

And it is not just the US where the market is underpricing risk. Look at the chart at the top: that’s right, the other place where Edwards is focusing on is China itself.

Two key items of Chinese data seem to have escaped close investor attention over the past week – maybe because of the flash crash. While I mentioned last Wednesday, what really surprised me that day was not the reaction in the wake of the US retail sales, but the fact that there was no reaction to the overnight news that China’s CPI inflation had slid to only 1.6% in September from 2% – I expected that to trigger a strong US Treasury rally in the European morning. Anyway, we have long warned that CPI inflation would gravitate downwards towards the GDP deflator, and that is indeed what is happening. Along with the 7.3% Q3 GDP data, the GDP deflator was also released showing economy-wide inflation is only around the 1% mark. Clearly, China too remains at a deflationary  precipice.

 

Source: Datastream

Finally, I was also surprised to see that the $100bn decline in China’s Q3 FX reserves, the largest quarterly fall ever, drew limited comment. As I have explained, this reflects deterioration in Chinese competitiveness from its excessively strong real exchange rate and a deteriorating of its balance of payments. If we have been warning that slower growth in FX reserves represents monetary tightening, then a decline of this order of magnitude is like a credit crunch! These data will ultimately prove to be more important than last Wednesday’s US retail sales. As I said two weeks ago “sell everything and run for your lives”.

 

So if Edwards is right, and the only two sources of growth in 2015 are taken out of the picture, watch how from 4% growth in 2014 the world grinds to an economic halt in the coming year. Which of course, would mean a global recession, if not worse, and this time not all the snows in Antarctica will save the narrative.

The only question is Edwards will be right this time, or if the “morons” will once again have the last laugh?

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Now you can substantiate to today’s generation why that ’60s and ’70s era’s music was objectively “better,” as JPMorgan’s CIO Michael Cembalest has previously noted, and furthermore, researchers also found that popular music has gotten a lot louder (as SAT scores have plunged.. hhmm?) However, as Consequence of Sound notes, a software application writer by the name of Virgil Griffith has charted musical tastes based on the average SAT scores of various college institutions… and the results are.. interesting. Bob Dylan, The Shins, Radiohead, and Counting Crows are the favorite bands of smart people. Meanwhile, Lil Wayne, Beyoncé, The Used, and gospel music comes in at the lower end of the spectrum — or, as Griffith puts it, is music for dumb people.

Via Consequence of Sound blog,

 

Among other interesting revelations from the Griffith’s chart: Smart people prefer John Mayer over Pink Floyd; rock titans like Tool, System of a Down, and Pearl Jam fall right in the middle — so, music for average people?; and people still listen to Switchfoot.

 

 

 

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Of course, correlation is not causation but…

 

As JPMorgan’s Michael Cembalest has previously noted, there has been a “progressive homogenization of the musical discourse”, a process which has resulted in music becoming blander and louder.

Bring those classic rock and R&B playlists back

 

Now you can substantiate to today’s generation why that era’s music was objectively “better”.

 

The Million Song Dataset is a database of western popular music produced from 1955 to 2010. As described in Scientific Reports (affiliated with the publication Scientific American), researchers developed algorithms to see what has changed over time, focusing on three variables: timbre, pitch and loudness. Timbre is a proxy for texture and tone quality, terms which reflect the variety and richness of a given sound. Higher levels of timbre most often result from diverse instrumentation (more than one instrument playing the same note). Pitch refers to the tonal structure of a song: how the chords progress, and the diversity of transitions between chords. Since the 1960’s, timbral variety has been steadily declining, and chord transitions have become narrower and more predictable.

The researchers also found that popular music has gotten a lot louder. The median recorded loudness value of songs by year is shown in the second chart. One illustrative example: in 2008, Metallica fans complained that the Guitar Hero version of its recent album sounded better than it did on CD. As reported in Rolling Stone, the CD version was re-mastered at too high a decibel level, part of the Loudness Wars affecting popular music.

 

Overall, the researchers concluded that there has been a “progressive homogenization of the musical discourse”, a process which has resulted in music becoming blander and louder. This might seem like a reactionary point of view for an adult to write, but the data does seem to back me up on this. All of that being said, I do like that Method Man-Mary J. Blige duet.

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So now you know…

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Short of China converting to a democracy tomorrow and the European Union becoming the giant that every backpacking teenager wished it could be, the US will remain the currency of choice for Oil, gold, and any other commodity, raw material, and energy available on this pseudo green earth.  Yes, aliens descending from MARS with technologies into the next millennium may make this a less compelling argument.  For the time being, the bet is on the USD.  

Take Japan for instance.  In the early nineties numerous economists and analysts were suggesting the Yen will become the currency of choice after the Japanese binge of US assets in the late eighties and early nineties.  The USD was on the “outs”.  History proved this notion wrong. Not only did Japan not become the currency of choice, but the Yen became the center of what was commonly referred to as the carry trade of choice.  The Japanese economy is only now hinting at an exit of the stagflation that took place during the 1990’s and 2000’s.   

We know what is happening in Europe.  Does the global economic power really want a currency that is mired in incongruous and possibly debilitating political strife, inefficient diplomacy, lack of sufficient job creation, to be the backing of all materials that contribute to global production and growth?  For the time being, NO.

On to China. Yes, the Chinese have grown by leaps and bounds in the last 15 years.  A little known fact, in the year 496 was China had 50% of global GDP.  The Chinese have already surpassed Japan to be the 2nd largest economy.  Even with “slower growth”, 7.3% growth per annum is nothing to gloss over. The problem with China, as every analyst, central banker, and hedge fund manager has commented is the reluctance of the Chinese government to reduce controls of the Yuan. 

The reason for the control of the currency is the fact that China is a communist regime with capitalist tendencies.  What is the probability that China will see the Western Light and convert to a capitalist democracy?  Clearly, quite low.  Does the G20 feel comfortable in readjusting the entire macro-economic mechanism to step away from the USD as a primary currency?  You know the answer to this answer as well as I do.

Given crisis and after crisis, through crashes and market exuberance, the USD and the US treasury market has been the bastion of “perceived” security and caution.  Grounded with the strength of an economy and a political system that by-in-large is able to sustain itself from little geo-political interventions.  What other country and currency is able to offer a bit of security and comfort in a world of contortion, confusion, and malfeasance? Yes.  That’s right. As I write this, we are getting word of a possible EBLOA case in NYC. So I am keeping my fingers crossed.  

I challenge the central banker, manager, trader, and investors to manufacture and financially engineer a safer and better alternative to the USD.

E Pluribus Unum

 

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"If there's no water for people to live, and you don’t have the basic necessities of life, your population is going to leave," warns the emergency services manager of one California town, warning that as the drought continues (and is not set to ease anytime soon), "you could see the economy of this area just decimated." But as farmers face the catastrophe with "water levels dropping at an incredibly rapid rate in some places – like 100 ft a year – 10 times expected," there is another drain on the dry state's water sources. As The FT reports, "Marijuana cultivation is the biggest drought-related crime we’re facing right now," with up to 80 million gallons of water per day stolen by heavily armed marijuana cartels.

 

 

As The FT reports,

Lieutenant John Nores Jr estimates that each of the state’s 2,000-odd cartel pot farms contains an average of 5,000 plants, and that each one sucks up between eight and 11 gallons of water a day, depending on the time of year. That means at least 80m gallons of water – enough for more than 120 Olympic-size swimming pools – is probably being stolen daily in a state that in some parts is running dry as a three-year-old drought shrinks reservoirs, leaves fields fallow and dries wells to the point that some 1,300 people have had no tap water in their homes for months.

 

…

 

“Marijuana cultivation is the biggest drought-related crime we’re facing right now,” says Lt Nores as he pokes at a heap of plastic piping the growers used to divert water from a dried-up creek near the plantation.

 

The theft of 80m gallons of water a day by heavily armed marijuana cartels is undoubtedly a serious concern, not least when the entire state is affected by drought and 58 per cent is categorised as being in “exceptional drought”, as defined by the government-funded US Drought Monitor.

However, this is a tiny fraction of the water used legally every day…

and towns across California plunge into chaos…

The crisis is more severe because a decline in snowfall has compounded problems caused by the lack of rain. The state’s mountain snowpack was just 18 per cent of its average earlier this year, a situation scientists say could be repeated as the climate warms.

 

As a result eight major reservoirs were last week holding less than half their average storage for this time of year.

 

Reservoir levels sank worryingly when a bad drought hit California in 1976-77, but there were fewer than 22m people in the state then, compared with 38.3m now.

 

…

 

In a normal year, aquifers supply about a third of the state’s water. In a drought, that can rise to as much as 60 per cent. But one of the most alarming aspects of this drought is that groundwater levels are plummeting.

 

“Water levels are dropping at an incredibly rapid rate in some places, like 100ft a year,” says Michelle Sneed, a hydrologist with the US Geological Survey who monitors groundwater in the Central Valley. “It is very extreme. Ordinarily, talking with hydrologists, if you would talk about a well dropping 10ft a year that would really get somebody’s attention, like wow! Really? Ten feet? And now we’re 10 times that.”

 

The depletion of this vital resource is not just a concern because it is so difficult to refill some aquifers when drought eventually subsides. It is also creating extraordinary rates of subsidence because as the groundwater disappears the land above it can sink. In one part of the valley, land has been subsiding by almost a foot a year, which Ms Sneed says is among the fastest rates anywhere in the world.

 

…

 

The town of East Porterville has more pressing groundwater worries. At least 1,300 people in the town rely for drinking and bathing water on wells that have gone dry as the drought has deepened.

 

“We ran out of water in June,” says Donna Johnson, a 72-year-old retired counsellor who delivers water to dozens of dry households from the back of her pick-up truck.

 

…

 

But the severity of this drought finally led to a package of measures signed into law in September requiring local agencies to monitor and manage wells, or face state intervention. Some critics say it is too little too late: many local agencies will have five to seven years to come up with plans, and until 2040 to implement them. Still, it is a lot better than nothing, say others.

 

…

 

That is small comfort when the latest outlook from the US Climate Prediction Center suggests the drought “will likely persist or intensify in large parts of the state” this winter.

 

“If there’s no water for people to live, and you don’t have the basic necessities of life, your population is going to leave,” says Andrew Lockman, the emergency services manager responsible for East Porterville. “Our primary economic driver is agriculture. If there’s no water to water crops, we’re not going to have any agriculture business, so you could see the economy of this area just decimated.”

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In yet another blow for the doctors fighting the spread of this deadly disease, AP reports, Mali’s health minister says the West African country has confirmed its first case of Ebola. Despite every effort to close borders, quarantine areas, and now send US troops (to do… well we are not sure really), Mali becomes the sixth West African country to report an Ebola case.

 

Mauvaise Nouvelle EBOLA:
Le Mali vient d’enregistrer son premier cas positif. Il s’agit d’une fillette de 2 ans( Ministère de la santé)

— dr. etienne fakaba (@etiooo) October 23, 2014

 

 

As AP reports,

Mali’s health minister says the West African country has confirmed its first case of Ebola.

 

The announcement made on Malian state television Thursday evening by Ousmane Kone said that the patient was a 2-year-old girl who had come from neighboring Guinea.

 

The child was brought to a hospital in the Malian town of Kayes on Wednesday, and her blood sample tested positive for the virus.

 

Mali becomes the sixth West African country to report an Ebola case — though nearly all the cases and deaths have occurred in Liberia, Sierra Leone and Guinea.

 

Senegal and Nigeria had imported cases though both have now been declared Ebola-free.

 

The World Health Organization says the disease has killed at least 4,877 people and infected 9,936.

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Sadly this comes just hours after WHO said the following:

The World Health Organization said on Thursday it was still trying to slow the rate of new infections but had “reasonable confidence” that the Ebola virus plaguing three West African ountries had not spread into neighbouring states.

 

Asked whether countries such as Guinea Bissau, Mali and Ivory Coast might have cases of the disease crossing their borders without knowing about or reporting them, WHO assistant director general Keiji Fukuda said he considered that unlikely.

“I think that there is reasonable confidence right now that we are not seeing widespread transmission of Ebola into the neighbouring countries,” Fukuda told a news briefing in Geneva. 

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Nailed it!

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Submitted by Lance Roberts of STA Wealth Management,

Inflation Goal Elusive For A Decade

I have written previously about the Federal Reserve's real worry which is a rise in deflationary pressures:

"The biggest fear of the Federal Reserve has been the deflationary pressures that have continued to depress the domestic economy. Despite the trillions of dollars of interventions by the Fed, the only real accomplishment has been keeping the economy from slipping back into an outright recession.

 

Despite many claims to the contrary, the global economy is far from healed which explains the need for ongoing global central bank interventions. However, even these interventions seem to be having a diminished rate of return in spurring real economic activity despite the inflation of asset prices.

 

Despite the ongoing rhetoric of those fearing inflation due to the Fed's monetary interventions the reality is that such actions have, so far, failed to overcome the deflationary forces of weak global demand."

What is quickly being realized on a global basis is that injecting the system with liquidity that flows into asset prices, does not create organic economic demand. Both Japan and the Eurozone's interventions have failed to spark inflationary pressures as the massive debt burden's carried by these countries continues to sap the ability to stimulate real growth. The U.S. is facing the same pressures as continued stimulative measures have only succeeded in widening the wealth gap but failed to spark inflation or higher levels of economic prosperity for 90% of Americans.

When interest rates spiked in 2013, and many calls for the "death of the bond bull" were being made, I was one of the few screaming that this would not be the case. The reason for my steadfast belief was simply the lack of the three catalysts required to spark inflation: rising commodity prices, rising wages and increased monetary velocity.

(Read this for more on the construction of the index)

The reason I am dredging all of this history is to reiterate the point that Central Bank interventions have been proven NOT to be inflationary NOR effective in stimulating actual organic economic growth.

As stated by Bloomberg:

"Inflation expectations have plummeted in the past three months, with yields of Treasuries implying consumer prices will rise an average 1.5 percent annually through the third quarter of 2019. In the past decade, those predictions have come within 0.1 percentage point of the actual rate of price increases in the following five years, data compiled by Bloomberg show."

What Bloomberg is addressing is that both the drop in Treasury yields, along with the decline of "Breakeven Inflation Rates" (the spread between equivalent treasury and inflation-adjusted rates), are suggesting that inflationary pressures are nowhere on the horizon. It also suggests that expectations for 3% economic growth over the next several quarters is also likely to come up short.

 

The Recent Rally May Not Last

That is the title to an article by Michael Kahn at Barron's which has extremely similar tone to a piece I wrote earlier this week entitled "Be Cautious: Correction May Not Be Over."

Michael makes a couple of good points that confirms much of my analysis, to wit:

"Since the steadiest part of the bull market began two-years ago, every pullback was very sharp and very quick. Some call them 'V' bottoms although that term is really reserved for the end of bear markets, not market dips. However, the meaning is similar as the market’s mood turned on a dime from fear to greed."

"There is something profoundly different about the rebound this week versus prior rebounds. This time, it occurred below the bull market trendline. When a major trendline such as this is broken to the downside, strict interpretation of the technicals says that the bull is over. Therefore, rebounds now take place in the context of a flat or even falling market, not a bull market."

The recent correction has inflicted a good bit of technical damage to the market that is unlikely to be cleared on an extremely short-term basis. While anything is certainly possible, the ability of the markets to make a run at new highs is much more suspect given the extraction of the Fed's liquidity driven support next week. This is a set-up we have seen previously as I pointed out in my analysis earlier this week.

"With the Fed's liquidity support now ending, the markets have once again plunged below the bullish trendline. The current rally, like every other time, is most likely a short-lived rebound from extremely oversold short-term conditions."

"Importantly, the deterioration in the internal dynamics of the market also suggest that the current rebound is not the resumption of the current bull market cycle, but rather a bounce that will likely be used to liquidate holdings. This will likely lead to a retest of lows, or even perhaps the setting of a new low, before a bullish trend can be re-established."

Michael sums the current situation very well stating:

"But for now, all we have is hints and possibilities. The rally from last weeks low does not have enough merits on its own to continue much higher so the bears may be resurrected from the depths of short-covering hell."

 

Interesting Thought Of For The Day

My friend Michael Gayed recently penned a very interesting thought:

"I believe that the Last Great Bubble is bursting — faith in central banks to solve all problems."

I agree with Michael. The mantra has been over the last five years that you "do not fight the Fed." The problem, as discussed above, is that the Bank of Japan, the ECB and the Fed have all failed in accomplishing their objective of "reflating" the global economy.

The issue that has been consistently ignored is the massive, and expanding, debt burdens that act as a deflationary drag on economic growth and inflation. Despite statistical economic headlines, the underpinnings of the domestic economy remain far too weak to create the level of consumption needed to support stronger economic growth. The bond market has already recognized that inflation isn't coming, Japan and the Eurozone economies are slipping quickly back into recession, and even China's seeming inexhaustible growth has begun to drag. These aren't the drivers of a "secular" bull market.

As Michael concludes:

"A growing economy coincides with rising inflation expectations. A healthy bull market coincides with rising inflation expectations. Fight the Fed? You sure they are going to get that inflation target when the market itself is screaming they won't, at the same time quantitative easing is ending?"

Or, maybe this time really is different?

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