Authored by David Stockman via The Daily Reckoning, Just call it Peak Crazy and move on. There is absolutely no reason for the stock markets to be at current levels, let alone melting-up day after day. The fact that this is happening is a measure of how impaired capital markets have become as a result of massive central bank intrusion. The robo-machines and day traders keep buying the dips because that has “worked” for the last 100 months. There is nothing more to it than residual momentum. Under a regime of honest money and price discovery, the stock market discounts the future. There is no plausible future from here that’s worth 24 times S&P 500 value or 96 times the Russell 2000. Surely the year-ahead earnings boom that Wall Street’s artists have penciled in is not in the slightest bit plausible. With 84% of the S&P 500 reporting Q2 results, LTM earnings are still 1.3% below where they were in September 2014. Nothing has happened to corporate earnings in the last three years except deflation in the energy, materials and industrial sectors. After hitting $106 per share in September 2014, the global deflation cycle brought them to a low point of $86.44 per share in March 2016 in response to low $30s oil prices. The latter has since recovered to the $50 dollar zone – bringing S&P 500 earnings back to $104.61 during the current quarter. The question remains: How does an aging business cycle and immense global headwinds justify the expectation of a red hot earnings breakout during the next 18 months? Yet that’s what’s happening on Wall Street. We’ve hit nearly $133 per share of GAAP earnings (and $145 of the ex-items variety) for the LTM period ending in December 2018, meaning a prospective surge of 27%. Even if you credit Wall Street’s ex-items approach to operating earnings, the story is the same. Why will the eventual 2018 outcome be any different than the cliff-diving of the last three years? As things stand, 2018 expectations look way elevated. The current earnings growth estimated for 2018 would amount to more than the 23% gain that has been recorded during the past decade! In June 2007, reported LTM earnings for the S&P 500 was posted at $85 per share. That would mean that earnings have grown at the tepid rate of 2.1% per annum for the last 10-years; and those are nominal dollars. Take out inflation and share buybacks and there’s essentially no gain at all on a peak-to-peak basis. When it comes to robo-traders, there are some very powerful muscle memory aspects pushing the averages relentlessly higher. It’s the deformation you get when the normal mechanisms of market discipline, such as short sellers and economic pricing of options and hedges, that are destroyed by wealth effects based central planning. It is Wall Street’s extreme vulnerability to violent crashes that come when two-way markets are destroyed in the name of tricking people into believing they are wealthier than they actually are. The bubble reaches its height and then there is nothing left below because stock prices have become decoupled from economic and profit fundamentals. The financial truth remains that nothing grows to the sky, including the Dow index. The cracks are already emerging all around. The end-of-bubble narrowing to fewer and fewer big cap safe havens is proceeding rapidly. Since July 25, before Amazon’s big earnings miss, most of the market had been falling or treading water. While the Dow is up by 2.2%, the transports were down by 2.8% and the Russell 2000 is off by 2.6%. The S&P 500 equal weight index is off by 0.8% and even the NASDAQ 100 is 0.5% below its July 25th level. In this machine driven market, any of these indices could resume their mad momentum based climb. But negative divergences are breaking out everywhere, and that’s usually a sign that the end is near. Margins on debt has again reached an all-time high of $550 billion. The chart below leaves little doubt as to what comes next. After the 2000 peak, margin debt collapsed by 50% as stocks were violently liquidated to meet margin calls. All this while in 2008 the shrinkage of margin debt was even larger – nearly 60%. This time, however, a similar shrinkage would cause a $325 billion decline in margin balances. That’s a lot of stocks on a fire sale. The casino will eventually collapse under its own weight, even as the fractures and divergences continue to mount. The economic Swans are coming. If Trump’s continued tweet-storms are any indication, the first Swan is likely to be Orange. The fact is, the occupant of the Oval Office is flat-out delusional and unhinged. Within 4-5 weeks Trump will be impaled on a debt ceiling and continuing resolution crisis which will suck all the air from the governance process in Washington. The event will make a mockery of the White House pitch and any belief for House action on the tax bill in October. The only thing which will happen by year-end on Capitol Hill is an inglorious defeat on ObamaCare repeal (instead, there will be an insurance company bailout in return for some tiny changes in the ObamaCare insurance mandates). Expect repeated short-term patches on the debt ceiling and continuing resolutions that will manage to keep the lights on in the Washington Monument a few weeks at a time. We seriously doubt the Donald will survive the market crash which is likely to be triggered by the unexpected fiscal bloodbath just around the corner. From there he will rue the day that he left Janet Yellen at the Fed in place, rather than allowing the “big fat, ugly bubble” to collapse on their account in January. Now that Trump and his surrogates are taking ownership of a hideously over-valued stock market, there’s little doubt that the coming crash will be the straw that breaks the camel’s back. As we have previously noted, Tricky Dick’s election in 1972 was also treated with a 15% market bump. And that was on the back of a 42-28 million vote landslide and running the tables on the electoral college with 504 votes. Nixon appeared to be especially invincible in January 1973 because he had spent 27 years on the GOP circuit. He had spoke for more GOP politicians and candidates than any President in recorded history, before or since. Still, the Nixon bubble evaporated steadily – dropping by more than one-third until Tricky Dick was shown his way out of the White House. It now seems likely that Trump Bubble’s collapse will be far faster, deeper and more violent. The Orange Swan is what now hangs over the market like the Sword of Damocles. The question is only about when, not if, it comes plunging down on a casino mad with Peak Crazy.
One day after the 5th consecutive miss in US CPI, NY Fed President William Dudley threw currency and eurodollar traders for another loop when he said on Monday that it was not "unreasonable" to think that the central bank would begin trimming its balance sheet in September and sees another rate hike this year - supposedly in December - should economic data hold up, ignoring the message sent from monthly inflation reports. In an interview with the AP, Dudely warned that "the expectations of market participants are unreasonable," when asked if the expectation of the Fed reducing its bond holdings in September was accurate. The news sent the dollar and yields higher, pushing the 10Y from 2.2050% briefly to 2.2230%, although the move was subsequently faded. The news also sent December rate hike odds modestly higher on the day, up to 33% from 25% earlier, after Dudley said that he expects another rate rise as long as economic data meets his expectations. "I would expect — I would be in favor of doing another rate hike later this year." Despite the lack of inflation, Dudley expanded "my outlook for the economy hasn't changed materially since the beginning of the year. Continue to look for growths around 2%, slightly above trend, growth sufficient to continue to tighten the labor market. I did not raise my growth forecast after the Election because of the prospect of fiscal stimulus because I felt that there was a lot of uncertainty about how big it would be, what its composition would be, and when it would actually take effect. So, I always viewed it as a risk to the forecast. In other words, an upside risk to the forecast, but I never put it into my baseline forecast." Pressed on inflation, the NY Fed president said "the reason why inflation won't get up to 2% very quickly on a year-over-year basis is because we've had these very low inflation readings over the last 4 or 5 months. So it's going to take time for those to sort of drop out of the year-over-year calculation." "Now the reason why I think you'd want to continue to gradually remove monetary policy accommodation, even with inflation somewhat below target, is that 1) monetary policy is still accommodative, so the level of short-term rates is pretty low, and 2) and this is probably even more important, financial conditions have been easing rather than tightening. So despite the fact that we've raised short-term interest rates, financial conditions are easier today than they were a year ago." Some more highlights from his interview transcript, courtesy of Bloomberg: "The stock market's up, credit spreads have narrowed, the dollar has weakened, and those have more than offset the effects of somewhat higher short-term rates and the very modest increases that we've seen in longer-term yields." On December hike odds, Dudley said that "If it (data) evolves in line with my expectations, I would expect -- I would be in favor of doing another rate hike later this year." "I think that if the economy continues to grow above trend, and the labor market continues to tighten, I do think we'll get to the point where that will lead to higher wages and that will show up in terms of higher inflation." "Now, the question is at what level of the unemployment rate will that all take place? So, if there are these secular forces that are pushing inflation lower, perhaps we can actually go to a somewhat lower unemployment rate. I would actually view -- rather than people wringing their hands that this is so awful that inflation is low, it actually might be a good thing because it could allow you to run the economy at a little bit higher level of resource utilization, which I think ... people get employed, they get job skills, they'd be able to build their human capital over time. (00:07:29) The productive capacity of the US economy would be greater -- all those things would be good things." There was also the amusing, token take on the stock market as reflective of the current state of the economy: "My own view is that -- I'm not particularly concerned about where our asset prices are today for a couple of reasons. The main one is that I think that the asset prices are pretty consistent with what we're seeing in terms of the actual performance of the economy." Which of course, is a "fake news": Dudley also spoke on balance sheet reduction: "And second of all, we can obviously announce the start of the program but delay the actual start date. So I think that -- I don't think the debt limit will have big impact on our decision about whether to start or not start the balance sheet normalization process... It's one of the reasons why the reinvestment process, phasing that down, is going to happen very gradually, that we're not just going to stop abruptly because we want to make sure that the adjustments are small, the model is gentle, and don't have a big consequence for financial statements.So far I would say that the market reaction has been extraordinarily mild. As expectations have gone from relatively low probability that we're going to start this to a very high probability that we're going to start this relatively soon. And so that makes me more confident that when we start, it's not going to have a big consequence for financial statements." Finally, on whether Gary Cohn will replace Janet Yellen: "I don't want to evaluate the various candidates for the Federal Reserve, except to say that I think Gary is a reasonable candidate. He knows a lot about financial markets. He knows lots about the financial system. I don't think you have to have a PhD in Economics, which I have, to be a Chair of the Fed or Governor or a President of one of the Federal Reserve Banks."
The following article by David Haggith was published on The Great Recession Blog: August is a sultry month for stocks as markets thin out during the dog days of summer. Everyone leaves investing for a break from the heat. Statistically, August is the worst month for overall stock performance, while September delivers more of whatever August sends its way or brings its own dark surprises. After that, October loves a surprise and is the worst for having the most major crashes. As markets now slide into their toughest time of the year, they also also face a major war of words that may quickly become more than words. The days of market calm appear now to have ended. $500 billion worth of supposed US market “value” just cascaded into oblivion last week. (Over a trillion worldwide. Of course, it could reappear tomorrow.) Markets crawling under the clouds of war One place where August is living up to its reputation is in volatility. August is usually the most volatile month of the year. The US stock market’s volatility index (VIX) became eerily placid for many weeks this summer, but this past week the VIX rose 70%. Of course 70% from a position so small and calm is not a lot, but it’s an awakening. And there appear to be many people and institutions now awakening. PIMCO, as one big example, began loading up on puts to hedge against a market plunge while building up a strong cash position, suspecting the highly unusual calm is the kind that comes before a big storm. PIMCO’s chief investment officer said that Pimco “has been taking profits [a nice way to say selling off its stock holdings] in high-valued corporate credits and built cash balances for when better opportunities arise.” That’s also a cautious way of saying, “We’re getting liquidity higher,” Ivascyn told Reuters in a phone interview. “If we see actual military altercation, markets can go a lot lower. And at the same time, volatility has been so low for so long that it doesn’t take much for markets to get worked up.” The PIMCO CIO said that although the market has yet to panic, “you will certainly see panic if all of this turns into a sustained military encounter.” (Zero Hedge) So, not everyone in high places sees the market’s languor as good. Now, under the clouds of war with North Korea, the calm is giving way. Trade war with China on horizon Not all wars that can damage an economy or a stock market involve weapons of mass destruction. While Trump and Kim Jong-Un are going nuclear with their rhetoric as well as their actual war footing (“Military solutions are now firmly in place … our nuclear arsenal … now far stronger and more powerful than ever before,” Trump tweeted), Trump has also declared trade war on China, saying such a war will be launched in a week. As if there weren’t enough geopolitical and social stress points in the world to fill a lifetime of “sleepy, vacationy” Augusts, late on Friday night President Trump spoke to Chinese President Xi Jinping and told him that he’s preparing to order an investigation into Chinese trade practices next week, according to NBC. Politico confirms that Trump is ready to launch a new trade crackdown on China next week…. It is also an escalation which most analysts agree will launch a trade war between Washington and Beijing…. Should Trump follow through, the move will lay the groundwork for Trump to impose tariffs against Chinese imports, which will mark a significant escalation in his efforts to reshape the trade relationship between the world’s two largest economies. In other words, even if there is now conventional war announced with either North Korea or Venezuela, Trump’s next step is to launch a trade war against China. (Zero Hedge) The near inevitability of both wars Both wars may be next to inevitable and were certainly not unforeseeable (black swans) when I said the economy would crash this summer. They are those dark clouds among a whole horizon of storm clouds that I’ve been pointing out — the clouds that I’ve been saying have been growing closer to us and would be here by summer, making a summer economic storm almost inevitable, too. The US government under Obama refused to take military actions against North Korea while it was becoming a nuclear power, so now North Korea is a nuclear power. Surprise! Not really. Who couldn’t see this coming for more than a decade? The now global known reality forces the US to a worse conundrum — wage a war with an unstable nuclear nation run by a lunatic or let an unstable nuclear power with an insane leader achieve a great deal more nuclear capability. (Some might wonder which nation I’m speaking of.) That’s what inaction on tough problems for too long brings you — worse problems. The US kicked the can down the road when there was no real threat of nuclear retaliation; now there is a clear and credible threat of nuclear retaliation. The same is true with Chinese trade. The US government under Obama turned a blind eye to Chinese trade practices that fly in the face of truly “fair trade,” again kicking the can down the road for years, rather than confronting the problem head on. So, now the US faces the risk of starting a trade war at a time when it may be starting a military war and at a time when it needs China to remain neutral with respect to North Korea if there is a war or to be an ally in getting North Korea to change (an unlikely prospect). Congress and Obama kicked the can down the road with respect to needed economic reforms, Korean nuclear armament, and unfair Chinese trade practices, always preferring to “talk about it,” and each problem has only become far harder to solve. That, of course, is what I claimed would happen when I started writing The Great Recession Blog: all of the government’s weak-kneed, temporary solutions would push the nation’s economic problems ahead, making them much harder to face in the future. That future is here. President Trump, Secretary of State Tillerson and Defense Secretary Mattis have all made it clear that a nuclear-armed North Korea with ICBMs that can hit the United States will not be allowed. If North Korea persists, this means war with the U.S. There’s only one problem: North Korea thinks we’re bluffing. North Korea believes that the U.S. is bluffing based in part on the prior failures of the U.S. to back up “red line” declarations in Syria over its alleged use of chemical weapons. Their belief is also based on the horrendous damage that would be inflicted on South Korea. China also believes the U.S. is bluffing. (–Jim Rickards in The Daily Reckoning) They probably do … after years of just talking about it or applying a smattering of half-hearted sanctions that were largely ignored by China. This is how wars begin: not because anyone wants a war, but because two sides misread each other’s intentions and stumble into one. Make no mistake — Trump is not bluffing. He’s deadly serious about ending the threat from North Korea. And he has support within the national security community. Trump probably is not bluffing when he threatens “fire and fury like the world has never seen.” If he is bluffing and tries to back away, the military industrial complex will tie a knot in his tail to keep him moving forward; but I think they have already fully won him over. Said Nikki Haley, the US Ambassador to the UN, “The time for talk is over.” Flatly stated. North Korea’s response to all this last week was to telegraph to the US its intentions to shoot nuclear-capable missiles over the heads of people in Guam. If it does so, is there anyone who believes the US military (or president) will wait to see if the missiles are armed or if they change course downward once they are over guam? As a number of writers noted last week, this is Trump’s Cuban Missile Crisis. A war of words Markets have not priced in war, but they are starting to now, and now they will have to price in congressional war, too, as congress returns from its summer vacation and starts fighting over the debt ceiling, which is thought to be a greater battle than Obamacare. Some prognosticators, like David Stockman, have been saying for months that congress will end up in an inevitable stalemate over the debt ceiling, leading to a full-on credit crisis. Maybe so, but Republicans have created such stalemates before in the form of government shutdowns and brinksmanship over the debt ceiling, and they might remember it didn’t turn out well for them the last time they created a situation that caused credit agencies to question their resolve to pay the nation’s debts. The nation was not terribly pleased with the resulting credit downgrade, and the market fell off a cliff exactly when I said it would, saved only by the Federal Reserve’s announcement of much more stimulus. As I noted in what seems now like many years ago, the US credit rating would be downgraded because congress knew it wouldn’t take the nation over the cliff of default but no one else knew congress wouldn’t go that far. More than likely, congress will find a way to kick the can down the road with some stop-gap, ill-conceived measures, as they’ve done throughout the Great Recession; but, in the meantime, a heated war of words will assault the stock market amid many other currently heated wars of words … all in the sultry heat of the market’s worst time of year. It doesn’t bode well for stocks. Rudy Penner, former director of the Congressional Budget Office said he anticipates a “very scary” fall in 2017. Fiscal issues will come to dominate, disrupting markets. “There are so many politically hard issues and so little consensus on budget and tax policy. I assume we’ll somehow get through this, but not without getting frightened on a regular basis,” Penner said. “Probably the best we can hope for is muddling through the … budget and the debt limit and getting very limited health, tax, and infrastructure legislation. There is not going to be significant stimulus coming out of Washington in the foreseeable future…. “The markets don’t seem to have absorbed the reality of Washington yet,” he said. “I have an uneasy feeling this will all end badly–that there will be a very major market correction.” (Zero Hedge) Something wicked this way comes Actually, a lot of somethings. Even if the wars simmer down, this is August and then comes September and October — all tending to be bad months for the market. This timing comes as market breadth has been narrowing down to fewer and fewer stocks carrying the main bullish action, usually a bearish sign. The action is now extremely narrow. In the latest part of the Nasdaq’s gains, the number of stocks seeing new lows increased — an even more bearish sign that overall movement is shifting downward. Finally, while market sentiment has recently been euphoric, in the past week it has started turning openly sour and worried — usually the last of signs before the market plunges. People start to visibly move toward the exits, and the noise of the crowds starts to grow. Formerly very bullish voices start to worry that something is about to give … because it is. It’s not panic yet, but the stock market has built up near-record levels of margin debt, and volatility is stirring again at last. The margin departments in brokerages are historically far more likely to give margin calls when volatility is rising, forcing those who have shorted stocks to pony up more collateral, which usually means selling stocks to raise the cash. That forced selling pushes the prices of stocks down further, creating a meltdown. Thatcreates panic! And all the right chemistry is in place. In the face of all this, the Fed is promising it will unwind its years of money printing, starting in September — something never seen before, which will begin from a height never imagined before the Great Recession. (They may backpedal on that if war gives them cause, or if the market starts to slide badly before they get there because of the growing tensions of nuclear war.) Then there is this little omen: During the past century, almost all years ending in seven have seen the market plunge at the end of summer or in the fall. While that is merely something that can feed superstition, the market has never been immune to human superstition. Then there is Trump’s failing war on crime The war on white-collar crime is a war that never was … and never was going to be. Just like the battle to lock up Hillary never was going to happen. It was total baloney every time he said it, and he knew it. He said it because it effectively stirred the crowds. Under Trump and his cabinet full of Goldman Sachs boys and girls, enforcement of financial regulations has plummeted. Regulatory penalties leveled against Wall Street are down by 60% this year from the same period last year and are on track to be the lowest number of penalties assessed in one year since 2008. Maybe Wall Street has just turned over a new leaf and the boys and girls who gamble in its casinos are behaving better so that fewer penalties are needed. Or maybe things have returned to the same lax deregulation state that helped create the last financial crisis when Greenspan assured congress that banks didn’t need tough regulations because they were naturally self-regulating out of their own self-interest. (Anyone who buys the new-leaf, self-regulating theories, please email me about some land I have for sale on the moon.) Backpedaling on regulations to where we were during the last economic collapse cannot possibly end up good, but it will take time to develop new critical fault lines of corruption deeply enough into the economy to cause new troubles. Does any of that sound like “draining the swamp?” I stopped believing Trump was going to drain the swamp as soon as I saw him putting Goldman Sachs in charge of everything financial. You don’t drain the swamp by putting the alligators in charge. Now Trump is even making love talk to Janet Yellen, having once derided her for supporting Obama and supporting Hillary’s election with a fake economy created through the Fed’s cheap money. Now that the cheap money has continued inflating the stock market while he is president (and at an even faster clip), Trump is all for it. Even though he once claimed Obama would wrongly take the credit on his way to the golf course for the economy’s fake recovery under Yellen’s low-interest policies, that hasn’t stopped Trump from taking the credit and claiming the economy is now doing great just because he was elected. I’m afraid Trump’s war on Washington was all talk as was his war on Hillary and on Wall Street. Talks of those battles was all just campaign puffing and bluffing. Maybe in the same way Trump’s words to North Korea will turn out to be a big military campaign bluff — sounds of fury signifying nothing. Giving him a little more benefit of the doubt, perhaps he is just heightening his rhetoric to get the rest of the world to take the North Korean nuclear problem seriously to try to avoid a military option. Regardless, the stock market is starting to price in the concern that it has been pretending to be unaware of. War appears almost inevitable now. The clouds are directly overhead, and the rumbles of fire and fury are clearly echoing back and forth between the clouds. Will this be one of those dry summer heat storms without rain or one of those deluges that sweeps away entire markets? One thing is certain: summer, so far, is shaping up exactly as I said it would at the start of the year. Nothing has proven those predictions entirely true, but everything is lining up as if it is all going to prove true. You might want to prepare a path to the storm-cellar door.
Shocking Admission From Global Head Of Strategy: "Our Clients Have Given Up On Valuation As A Metric"
For all the recent concerns about an "imminent" nuclear war with North Korea (not happening, according to the head of the CIA), which prompted a stunned reaction from Morgan Stanley which earlier today observed the "70% rise in the VIX index over three days, 2% drop in global equities, and more than a few holidays disrupted", leading it to conclude "Well, That Escalated Quickly", the market continues to ignore the real risk: the upcoming central bank balance sheet taper which will have a dire and drastic impact on markets according to Citi's global head of credit product strategy, Matt King: Markets seem optimistic that central bank plans to modestly reduce their support for markets in coming months can be achieved without disruption. We are not convinced. Borrowing an analogy from developmental psychology, King compares the relationship between the Fed and the market to that between a (failed) parent and a child obsessed with their cell phone. When other people’s children behave badly, the temptation is to presume it’s something to do with the parents. But then one day, even if you managed to avoid the terrible twos, your very own adolescent comes downstairs to breakfast with a look that could curdle the milk in its carton, fails even to grunt a response to your cheery good morning, and makes straight for their mobile phone. It shortly becomes clear that the mere fact of your breathing is something they find deeply offensive. Nothing in their previous twelve-or-so years of almost uninterrupted sweetness gave any hint of this. Where on earth did you go wrong? We imagine central bankers must feel similarly underappreciated every time markets fall into similar bouts of grumpiness. Like any parent, their initial instinct is to blame some sort of “external shock” – Eurozone sovereigns; weakness in emerging markets; a drop in oil prices; too much time spent hanging out with undesirable hedge-fund types. Like any parent, we think they would do well to focus less on eliminating potentially malign influences from the playground, and more on examining what in their own behaviour has left their offspring so fragile in the first place. In yet another fantastic piece released over the weekend, Citi's chief global strategist, King again - very patiently - explains why the markets and central bankers have misunderstood QE so profoundly, this time comparing it to the act of weening one's offspring off cell phone dependence: Misunderstandings over the effects of QE seem to us almost as large as the gap between how parents think their adolescents ought to feel and how they feel in practice. If you tell your teen you are going to reduce their screen time steadily down to zero because you are worried it’s affecting their behaviour, they do not simply sit there full of fond gratitude for the day you gave them a phone in the first place. At some point, they snap. This may not be justified, but a combination of habituated expectations and peer comparison means it is what happens in practice. Central bankers’ ideas about QE seem likewise to owe more to an academic view of an ideal market than to the drivers of the price movements we see on our screens every day. Of all the tens of academic and central-bank papers assessing the impact of QE and other central bank liquidity injections, not one considers the (really rather obvious) approach which is our favourite: simply adding up the global total value of securities purchased by central banks each month (Figure 1) and then comparing it with the spread movement in credit or the price movement in equities (Figure 2). The chart below - shown previously - is one of our favorites, and demonstrates the direct impact of central banks on asset prices: And as discussed before, it is what happens next that is most troubling: Hardly surprising, in his latest piece Matt King once again focuses on the same point he has been pounding the table on for the past year: "why we think markets will once again prove surprisingly sensitive in coming months." His arguments: First, we argue that in assessing potential dependence on QE, central banks have largely been looking in the wrong places and at the wrong metrics: QE works globally and in terms of the flow of CB purchases, not in terms of the stock, and exhibits stronger relationships with risk assets than with government bonds. Second, we argue that the primary mechanism through which QE has had an impact is an enormous squeeze on the net supply available to absorb private investors’ savings – and that following QE1, relatively little has fed through to the real economy. Third, we argue that central banks would be able to make a smooth exit either if fundamentals had improved so as to justify risk assets’ lofty valuations, or if those valuations were not so lofty in the first place – but demonstrate that neither of these is the case. Finally we look at the conclusion we think central banks ought to draw – and contrast it with what seems likely in practice. It can be tough to do the right thing as a parent. While much of the above has been covered extensively here before, with the critical topic of flow's dominance over stock first explained all the way back in 2012 in "The Stock Is Dead, Long-Live The Flow: Perpetual QE Has Arrived" an article which led to the correct forecast of QE3, and QE in Japan and Europe, we'll comment more in depth on point three, while touching on bullet point 2, the "net supply" argument (further discussed two months ago in "BofA: "If Bonds Are Right, Stocks Will Drop Up To 20%"). The argument here is simple, and logical: the more securities central banks soaked up from the market, the further they pushed investors into risky assets. Here is King: What happens in any market when you get steady net demand but zero net supply? Prices go up – regardless of the fundamentals. It sounds trite, but isn’t that exactly the pattern we’ve had across markets the past few years – be they govies or credit or equities or EM or real estate (Figure 12)? 2015 was an exception, but of course that’s exactly the period when net supply to markets did increase thanks to the drop in EMFX reserves, meaning that money that was previously being crowded into risk assets ended up absorbing increased net supply in govies. With central banks vowing to reduce their balance sheets, the net supply to markets will increase significantly, resulting - obviously - in lower prices and higher yields (this was also discussed in "If The Fed Sells Treasuries... Who Will Be Buying? Answer: "Other."" While the above is also hardly new, the key observation made by King in his latest piece is that not only do fundamentals no justify valuations, not only have investors been herded into risky assets at the guidance of the Fed (creating another bubble), but that "valuations are sky high", and once the Fed's training wheels come off, what happens next will be unpleasant: The ... reason we think the transition will be difficult is simply that the starting valuations are so high already. It would be much easier for fundamentals to take over from central bank liquidity if the valuations across markets they needed to justify were not close to the highest we have ever seen. Credit spreads have basically been tighter only in 2007 (a level which many investors thought would never be revisited). Equity volatility is at its lowest since the 1950s. The cyclically-adjusted P/E ratio on the S&P has been higher only twice: at the height of the dot-com bubble in 2000, and in 1929. Those with long memories are already fretting about valuations across the board and warning investors against being greedy. And a stunning admission by one of the world's biggest banks: investors - its clients - have effectively given up on valuation as a metric: Many investors we speak to seem almost to have given up on valuation as a metric. Rather like real estate in London or New York or Hong Kong, they are resigned to it: it may look expensive on paper, but the price is what it is, and they buy anyway. Several told us they would rather lose lots of money in company with the rest of the market than underperform slightly in a continuing rally and then suffer a fall in assets under management as investors moved elsewhere. The implications, also discussed previously, are profound - one could call it the bubble to end all bubbles: Indeed, much has been written about the wave of money migrating away from active managers towards ETFs and passive index funds. In a market rallying with low single-name volatility, the only way an active manager can outperform is by throwing caution to the wind and ensuring that they are long risk relative to the index. If large numbers of managers adopt the same strategy, it will inevitably render the market vulnerable. While King's missive against central bank manipulation touches on many more critical points, his assessment of what happens next is troubling for those who believe that central banks will keep market under control: As a general rule, it is probably easier to reduce teens’ dependence on phones if you have not been through multiple iterations of previously trying to do so, only to give in when they then responded badly. Depending on how you add up the various episodes of global QE, in markets we are either still on iteration #1 (our global central bank liquidity metric has remained permanently positive since 2009), or conversely at least iteration #10 (three episodes of QE + Twist in the US, two distinct periods from the ECB, two from the BoE, and at least two prolonged ones from the BoJ). While at a global level there has never been any attempt to reduce the size of central banks’ securities holdings, on each occasion to date that even the flow of purchases has been reduced, first markets and then the economy have faltered to the point that central banks have given in and come back with more liquidity still. The punchline: the impact on markets resulting from all the above would be rather devastating: at least a 100bps blow up in IG credit spreads and a 30% equity selloff: If the historical relationships shown earlier were to hold, the relatively modest reductions planned by the Fed and likely from the ECB over the next year, coupled with the surprisingly large reduction we have already seen in purchases from the BoJ since the shift to yield targeting, would be consistent with IG credit spreads widening some 100bp and global equities selling off 30%. Meanwhile, the Fed continues to exist inside its ivory tower, in which Yellen went so far as to say on the record two months ago that there will not be another financial crisis "in our lifetimes." In this context, we leave you with the following memorable passage from King: Central banks have tended to ignore such risks – indeed, with Janet Yellen memorably stating she considers another financial crisis unlikely within our lifetimes – in part because they are less convinced of markets’ deviation from fundamentals than we are, but also in large part because their very definition of financial stability is one which is centred on the banking system. Stability is equated directly with leverage; if there is less leverage, there can be no risk to stability. The other factor which has helped valuations reach this point is that no one can quite imagine the specific sort of trouble the market will get itself into. “What’s the catalyst?” we are often asked. Yet as with your children, if you wait until you can already see what sort of trouble they’re involved in, there’s a good chance you’re responding too late. Our best guess is some combination of market sell-off associated with investor outflows. With some over $800bn having gone into fixed income mutual funds over the past five years, of which over $500bn having gone into some form of IG credit fund, it would not be especially surprising to see some combination of elevated valuations and higher real yields on deposits or other safe assets cause investors to decide to take profit. Yes, there might well be some form of external trigger (concerns about conflict with North Korea?), but this in itself might well be unrelated. With debt/GDP at record high levels across most economies, it would be similarly unsurprising if negative wealth effects caused the resultant sell-off in risk assets to feed through to the real economy. Just because the rally in markets did not boost growth as much as central bankers were hoping does not mean that a sell-off would not affect it negatively: indeed, the fact that the benefits of market gains are narrowly distributed but losses might well be socialized means that increasing debt may well be automatically increasing the likelihood of an asymmetric reaction. Note further that we are therefore fully expecting markets to move first, and the economic reaction to follow only thereafter. It is not that we see higher interest rates leading to a spike in corporate defaults leading to outflows and an investor sell-off; it is that default rates have been suppressed (relative to their historical relationship with GDP growth, and relative to corporate leverage) by the supply-demand imbalance and wave of investor inflows allowing corporates to roll maturities and abandon covenants, and that a reversal of those inflows – whatever its cause – might lead to the expectation of increased defaults thereafter. This pattern may seem surprising, but of course it is exactly what happened in 2000 and 2007. It is not that a weakening economy precipitated a sell-off in the NASDAQ, or that a sudden recession dragged down the US housing market; it is that the bursting of each market bubble dragged down the economy. On each occasion it took a lower level of real interest rates to make investors change their minds about the assets they’d been buying and head for the safety of cash; on each occasion there was a higher level of debt across non-financial sectors. Now, there is more debt still.
Authored by Stefan Gleason via Money Metals Exchange, The Federal Reserve can make or break a president. Monetary policy influences all financial markets as well as the cycles in the economy. No president wants to have to run for re-election when the stock market and economy are turning down. Recall that President George H.W. Bush was sitting on sky-high job approval numbers in 1991 and was expected to coast to victory in his 1992 re-election bid. But then the economy swooned toward recession, giving Bill Clinton the opening he needed. Bush later blamed Federal Reserve chairman Alan Greenspan for his defeat. Greenspan had held interest rates too high for too long, Bush complained. On the campaign trail in 2016, Donald Trump complained that Fed chair Janet Yellen was trying to help Hillary Clinton by keeping rates near zero and pumping up the stock market with liquidity. “They're keeping the rates artificially low so that Obama can go out and play golf in January and say that he did a good job... It's a very false economy,” Trump told reporters in September 2016. Later that month in the second presidential debate, he declared, “We are in a big, fat, ugly bubble. . . The only thing that looks good is the stock market. But if you raise interest rates even a little bit, that's going to come crashing down.” Reappointing Janet Yellen Could Be Politically Dangerous to Trump Now that he’s president, Trump may have become the stock market bubble’s most high-profile cheerleader. He certainly doesn’t want it to burst on his watch. The president has warmed up to Yellen’s Dow-friendly easy money policies. He even suggested he might reappoint her to the Federal Reserve in early 2018. That would be a politically dangerous move. The Fed could help determine which party has the advantage in the 2018 mid-terms and the 2020 presidential election beyond that. Of course, Fed officials insist they are “data driven” and don’t make policy decisions based on politics. Whether they intend to be or not, Fed policymakers are inevitably involved in politics. The members of the Federal Reserve Board are political appointees. Yellen is a liberal Democrat, appointed by President Obama. She understands what’s at stake in the upcoming elections. She understands that Democrats are in a state of political desperation right now. They hold only 15 governorships, are a minority in Congress, and stand to be steadily replaced in the courts. But they STILL control the Federal Reserve Board. President Trump now has the opportunity to re-shape the Fed. Three of the seven positions on the Federal Reserve Board remain vacant. Trump can fill them. More importantly, he can replace Yellen as Fed chair next year. Fed Moves Could Crash the Stock Market, Hurting Republicans in 2018 It’s understandable that Trump is playing nice with Yellen while she’s helping keep things seemingly peachy keen in the markets. But the consequences of the Fed’s balance sheet “normalization” program may start to be fully felt next year. He shouldn’t underestimate the risks of the bubble he identified in 2016 bursting in time for the elections in 2018. This year’s mid-terms will be of particular concern to Fed officials. Republicans have a shot at expanding their majority in the Senate and finally being able to pass conservative legislation – including potentially an audit and reforms of the Federal Reserve system. In recent years, GOP reformers in Congress have pushed bills that would force the Fed to adhere to a rules-based formula for setting its target interest rate. That would help remove political conflicts of interest from policy decisions and make them less impactful on markets. Right now, any major monetary reform efforts would be met with insurmountable resistance by the keepers of the center-left status quo in the U.S. Senate. Yes, despite Republicans having a nominal majority in the Senate, conservatives are in the minority. That became abundantly clear when a pair of liberal Republicans joined anti-Trump establishmentarian John McCain in voting to save Obamacare from being repealed. Trump’s Priorities to Be Stymied Unless GOP Gains Seats It’s likely that none of Trump’s legislative priorities – from healthcare, to immigration, to taxes – will ever make it to his desk to become law. Unless conservative/libertarian-leaning Republicans hold onto the House and gain some Senate seats in 2018. Mid-terms typically result in net losses for the party that controls the White House. Democrats might be feeling good about their odds of winning back full control of the Senate... except for the fact they face a big structural disadvantage this time around. Democrats must defend 25 Senate seats in 2018, while Republicans only have to put 9 on the line. GOP strategists see an opportunity to expand their majority by knocking off vulnerable Democrat incumbents in Indiana, Missouri, Montana, North Dakota, and West Virginia – states that swung heavily for Trump in 2016. The question is: Will the economic backdrop be favorable for Republicans to campaign on the Trump agenda? That remains to be seen. Given the stakes, Donald Trump’s hiring decisions at the Fed could make or break his presidency.
Several weeks ago, Janet Yellen boldly declared "I don't believe we will see another crisis in our lifetime." For the rest of us who live in reality there is little doubt that the latest Fed-fueled credit bubble will eventually burst in epic fashion and once again lay waste to the personal balance sheets of millions of Americans. And while the timing of market collapses can never be predicted, UBS strategist Matthew Mish says there is one thing that is certain about the next credit unwind, it will be unlike anything we've seen before. To summarize, Mish notes that unlike previous credit expansion cycles, this current one has been dominated not by traditional banks but rather by non-bank lending entities and government backed loans, especially in riskier subprime residential, auto and student loans. Moreover, unlike traditional lenders, Government debt tends to be much slower to react to things like rising delinquency rates...you know, because it's just taxpayer money so who cares. First, non-bank lending (as a share of net loan growth) has accounted for about two thirds of the total expansion, akin to prior cycles. However, the non-bank share has been elevated in residential real estate (at 101%), but depressed in commercial real estate (30%) versus history. Second, the role of federal credit support has been very material, with a significant 45% of net loan growth this cycle coming from government (or government guaranteed) loans. In particular, government backed loans (as a share of the debt stock) now comprise a record 63% of residential and 29% of consumer loans, respectively, up 9% and 18% from 2010. In nominal terms, non-government related net debt growth has been negative for retail loans in aggregate. Third, while the share of non-bank lending has held steady, their share of higher risk debt has increased substantially across many loan categories. Non-banks account for 58% of outstanding adversely rated (leveraged loan) commitments, roughly 75% of recently originated FHA mortgage loans, and over 85% of subprime student and auto loans. With some exceptions (think auto and student loans), Mish notes that overall non-financial debt growth has roughly mirrored past credit cycles. First, while US private non-financial debt growth has been weak in nominal terms vs. historical standards, debt expansion relative to economic growth has been more normal – akin to the 1990s. Anything materially better, absent stronger growth, would look more like the last cycle. In particular, the rate of corporate and consumer debt growth has exceeded that of US nominal GDP, consistent with our prior work highlighting the elevated leverage across corporations and millennial consumers. That said, non-bank and government backed loans have taken on a much more substantial share of 'riskier' loan pools like residential and consumer debt. Second, there has been a material increase in federal credit support to the private sector, particularly in student and residential lending. Government debt pricing tends to be non-risk based, slower to react, and subject to political (vs. economic) interests. Investors should monitor changes in credit policy closely, but expect changes in loan standards to lag delinquencies as it will likely take material losses to trigger changes in federal support. And third, ceteris paribus the better early warning signals this cycle will be those indicators that can calibrate shifts in non-bank lending standards (which will pick up higher risk loans) and in credit markets with limited government intervention (where lenders will respond to changes in risk). In our view, these include indicators like our non-bank liquidity index, high-yield credit spreads, and auto and credit card loan performance. So what signs should you be on the look out for? And third, ceteris paribus the better early warning signals this cycle will be those indicators that can calibrate shifts in non-bank lending standards (which will pick up higher risk loans) and in credit markets with limited government intervention (where lenders will respond to changes in risk). In our view, these include indicators like our non-bank liquidity index, high-yield credit spreads, and auto and credit card loan performance. In summary, the next collapse in credit may come a little slower, since governments are far better than traditional lenders at burying their heads in the sand, but you shouldn't be too quick to buy into Yellen's delusions that "there will never be another crisis in our lifetime."
Speaking on Bloomberg Radio to Kathleen Hays this morning, outspoken St.Louis Fed chair James Bullard dropped two somewhat shocking reality-check tape-bombs... that we are sure will quickly be rescinded and translated for the hard-of-understanding... First, Bullard was aksed about concerns over a US economic recession. He began with the 'standard' response of any establishment type: "I don't see any recession on the horizon." But then, something got hold of him and he uttered the following omnipotence-threatening phrase... "But you never know." But, we thought you are supposed to know? Besides, aren't you and your cohorts responsible for pulling the strings of the centrally planned state? While notable, howevever, it was his second 'oops' that shocked many. Reflecting on the impact of unwinding The Fed's balance sheet, noting that it's effect was "almost nothing," Bullard decided to add the following: "The Fed has been reluctant to target equity prices." Which is a very different phrase from the usual utter denial from Janet Yellen or anyone else. Did Bullard just admit that The Fed does 'tinker' with stocks... but reluctantly? Is this confirmation that like SNB, PBOC, and BOJ, The Fed manipulates the US stock market? We're sure we'll never know, as if his comments are picked up by any other than the alternative media, it will be rapidly translated into doublespeak that confirms it means nothing. * * * And finally, as a bonus, Bullard admitted that "The Fed's inflation and growth 'misses' add up... and undercut credibility." Which raises a simple question - what credibility?
Fed Abandons "Yellen's Favorite" Labor Market Conditions Index (Because It Just Won't Fit The Narrative?)
Once Janet Yellen's favorite indicator (until it started to turn down, and became just "experimental"), The Fed's Labor Market Conditions Index (a 19-factor smoothed model that has historically correlated extremely well to recession) has been abandoned because The Fed "believes it no longer provides a good summary of changes in the US labor market." The Fed writes... As of August 3, 2017, updates to the labor market conditions index (LMCI) have been discontinued. We decided to stop updating the LMCI because we believe it no longer provides a good summary of changes in U.S. labor market conditions. Specifically, model estimates turned out to be more sensitive to the detrending procedure than we had expected, the measurement of some indicators in recent years has changed in ways that significantly degraded their signal content, and including average hourly earnings as an indicator did not provide a meaningful link between labor market conditions and wage growth. As Mike Shedlock noted so poignantly, "Using similar rationale, the Fed ought to disband itself." Of course, this is not the first indicator that The Fed has abandoned (Secondary Market CD rates, M3), which got us wondering, what is that really sparked the decision to abandon this broad, less-noisy, cyclical indicator? Perhaps this is why... As The Fed ended QE3, the growth rate in the US Labor Market peaked for the cycle. As The Fed began raising rates, the growth rate in the US Labor Market was plunging... and was in fact negative when The Fed hiked rates in Dec 2016. And now, as The Fed starts to shift 'dovish' on rates (preferring to focus on the maturing balance sheet), the US Labor Market is showing signs of life. So, maybe, just maybe, The Fed killed this 'signal' because it exposed their entire lack of data-dependence? Perhaps The Fed should take a look at this Labor Market Breadth Indicator?
Authored by Jeffrey Snyder via Alhambra Investment Partners, The mainstream media is about to be presented with another (small) gift. In its quest to discredit populism, the condition of inflation has become paramount for largely the right reasons (accidents do happen). In the context of the macro economy of 2017, inflation isn’t really about consumer prices except as a broad gauge of hidden monetary conditions. Therefore, if inflation behaves as it is supposed to after so many years of “stimulus”, then the political opposition to the status quo really is about racism and xenophobia. If, however, inflation underwhelms for now the sixth year and counting, there just might be something to this economic anxiety element of grand and growing political discord. In many ways this isn’t a point of contention at all, merely a misreading of what policymakers are actually doing and why. The global economy really has suffered some horrible fate, but what? Inflation underwhelms because the economy does and has, but policymakers in 2017 are trying to figure out why in a way that leaves them blameless. Any long-term GDP chart for any place shows clearly that it is small wonder political and social devastation took so long to start manifesting. That speaks to the power of Economics and the tremendous benefit of the doubt it began with, and then squandered. People largely believed Ben Bernanke when he said he knew what he was doing with QE2 (without ever accounting why he felt there needed to be a second) or Mario Draghi when he made his promise. The public did so because they wanted to believe such a big awful thing was fixable. The media is still stuck on the idea of the economy being fixed, however, though policymakers have more than a year ago shifted to figuring out why it won’t ever be. Inflation for them is now the measure of who’s to blame, not what will happen. Again, if inflation continues to underperform the 2% target here and elsewhere, even textbook Economics makes it a monetary reason. If it gets back to and above 2%, drug addicts and Baby Boomers would have been a legitimate structural drag, meaning QE failed because it stood no chance of ever working. You can see the stakes for central bankers as they have this year practically resorted to outright pleading, as if saying the thing over and over will increase the chances of it happening. So it must have been some relief when earlier this year oil price base effects raised the CPI to above 2% for three months starting last December (and the HICP for only one month in Europe). It would stay above 2% for a total of five, but those last two were on the way back down again, clearly showing that it was oil not the opioid epidemic the public should turn to for answers. Given the nature of its annual comparison, WTI was this July on an upswing whereas in July 2016 falling again. Crude oil’s contribution to consumer price inflation last month is once more significantly positive, meaning that in all likelihood on Friday when the BLS reports the CPI for July it will be accelerated from four straight months of “unexpected” weakness. There will certainly be much crowing and rejoicing. But it won’t matter for more than just a single news cycle, not the least of which because of the bond market that policymakers and especially economists (therefore the media) just can’t (or refuse) seem to understand. “The market has paid a lot more attention to inflation than in recent years, simply because that has the potential to be what changes the Fed’s mind on further rate hikes,” [said Gennadiy Goldberg, an interest-rate strategist at TD Securities]. This week’s report “has a pretty substantial amount of power to push rates to annual lows or getting us off those lows and pushing rates higher.” Once again, no, no, and no. The bond market takes no cues from monetary policy except if it views that policy to be effective. Interest rates rise because of opportunity, not because the Fed attempts to command it with the federal funds rate as in 2016, 2004, or even 1994. There is no “hawkishness” or “dovishness” by itself, instead the interpretation of “hawkishness” if things are actually getting better or “dovishness” if they aren’t. This other convention where the Fed is at the center of everything just doesn’t wash. It presupposes infallibility which has been proven not to exist. Presumably the Fed’s “hawkishness” derives from its proficiency in economic interpretation. Therefore, bond rates would rise not based on monetary policy action per se, but rather agreeing with the Fed’s interpretation of what “hawkishness” means as far as economic opportunity. To claim that the bond market must follow monetary policy is to simultaneously claim that the FOMC is always right; and further that bonds must always defer in that judgment to these economists. The bond market does not do this, though it does take into consideration central bank judgment as part of its stream of information. Before the summer of 2011, the bond market largely agreed with FOMC assessments. By and large, though, ever since 2011 the bond market which is always free to disagree with them about the economy or even the state of monetary function has exercised that freedom and in convincing fashion. From 2013 forward, nominal rates should have risen and curves steepened as economists and policymakers declared QE3 a resounding success, with particular emphasis on the unemployment rate. The bond market was correct, not economists. What drives UST yields or eurodollar futures prices is therefore not “hawkishness” or “dovishness”, but rather perceptions about whether “hawkishness”, “dovishness”, Trump, or even Paul Krugman’s fake alien invasion scenario will amount to anything positive and the significance of it. It is the translation of current conditions into considerations about the future, captured in prices and yields – the actual discounting of information, of which monetary policy is only a (variable) part. And oil prices factor to a much higher degree than Janet Yellen for these reasons. It is oil that moves the CPI (or PCE Deflator) which is a very negative commentary on the economy tomorrow as well as today. Unless oil prices really break higher, then the bond market gives far more weight to what the FOMC members would all rather never consider – the problem really is money and economy rather than drugs and demographics.
We have previously shown the chart below on countless occasions, so we are content to see that increasingly more banks are showcasing it as the biggest potential threat to the future of the market's artificial levitation. Here is BofA's Martin Mauro explaining why "investors may be well served by locking in some profits in US stocks." Central banks turning off the liquidity spigot: Among the most striking market developments in recent years has been the coordinated efforts by the world’s central banks to supply liquidity by purchasing financial assets. Investment Strategist Michael Hartnett points out that since the collapse of Lehman Brothers in 2008, central banks have bought $10.8 trillion in assets, and that liquidity has propelled financial markets all over the world. That phase, as Citi's Matt King warned two months ago, is ending. Now it appears that we are on the cusp of global synchronized monetary tightening, according to Hartnett. Central banks in the US, Canada and China have raised rates this year, while the Bank of England has stopped asset purchases and the European Central Bank is on track to end its asset purchases in 2018. Moreover, the reduced pace of re-investment that the Fed has outlined would reduce the size of its balance sheet by $2 trillion by the end of 2022. BofA's conclusion: "The unwind of the balance sheet could impose a strain on financial assets" and as a result BofA now believes "that investors may be well served by locking in some profits in US stocks." And while the unwind of the global central bank balance sheet will certainly have a dire effect on global risk assets, no matter what Bullard, Kocherlakota or the rest of the peanut gallery says (or rather, precisely because they deny it) a better question - one which Matt King asked two months ago - is whether this broken market can no longer execute its primary function: discounting the future: ... central banks still cling to the textbook model in which the market discounts all available information ahead of time, meaning that by the time they actually come to do their reduction, provided they’ve telegraphed it beforehand, the effect is already priced in. Unfortunately they seem to have neglected the textbook footnote that states that markets function this way only when they are deep and liquid. That might have been a reasonable description of pre-crisis markets; it seems a deeply unreasonable assumption for post-crisis markets in which leverage is constrained and one set of buyers have come along and absorbed virtually all of the world’s net new issuance. The above is a major issue for Janet Yellen because while the Fed may hope the market is only "modestly" broken, and can fix itself when the liquidity support is yanked, if the market is too broken to realize that it is broken, and just keeps grinding - or surging - higher and higher, the Fed will soon have a major problem on its hands as it will have no choice but to actively intervene in equity markets on the short side, a skill which none of the Fed's traders have after nearly a decade of only buying. But before that, it will be the bears that will be carted out first, because even though we are late, late, late into the cycle, the following table shows the S&P returns in the year just prior to every previous market peak: Although we are getting more cautious on equity markets, we note that some of the best returns come at the end of a bull market, which makes the case for maintaining some presence in the market. According to Subramanian, in the 12-month period preceding prior market peaks, the historical total return has average 25%. The S&P 500 is up 16% over the last 12 months, suggesting that some of those gains may have already been realized. Good luck timing the crash.
Authored by Robert Gore via Straight Line Logic blog, Mainstream analysis has been wrong for so long, why start believing it now? SLL has run a series of articles (“Plot Holes,” “Trump and Vault 7,” “Calling a Bluff?” “Let’s Connect the Dots,” “Powerball, Part One,” “Powerball, Part Two”) advancing interrelated hypotheses. We’ve asserted that President Trump is far smarter and the powers that be far stupider and weaker than current consensus estimates. Trump’s primary motivation is power. The nonstop vilification campaign against him has little to do with policy differences and instead reflects establishment fears that Trump will investigate, expose, and punish its criminality. The upshot of these hypotheses: Trump is winning and has consolidated his power. Reader reaction to this non-mainstream and admittedly speculative line of thinking has been mixed and often skeptical. However, we’ll press on, because our hypotheses have yielded testable predictions, most of which have been borne out. From “Powerball, Part Two”: To answer a question posed in Part One: if Trump has consolidated power both at home and abroad, don’t hold your breath waiting for a swamp draining. The most effective power is often power of which only a few know. Those he has by the short hairs would be most helpful to him—sub rosa—if they’re still in government. If such is the case, don’t be surprised if the Russia probe fades away, Trump’s nominal opposition consigns itself to rote denunciation, the Deep State sits still for his Middle Eastern policy changes, and he gets more of his agenda through than anyone expects. Even the Washington Post has admitted the Russia probe is “crumbling.” Trump and Sessions know Special Prosecutor Robert Mueller won’t find much because there’s nothing there, although there may be a sacrificial offering or two to propitiate the investigatory gods. Trump read Sessions the riot act via Twitter and a Wall Street Journal interview about not investigating Hillary Clinton, intelligence community leaks to the press, and Ukrainian efforts to sabotage his presidential campaign. He’s been roundly condemned for publicly criticizing Sessions, but here’s a speculative leap: perhaps publicly criticizing Sessions was not really what Trump was doing. Perhaps Trump was giving his attorney general political cover to pursue investigations against high-profile Democrats who cannot help Trump, sub rosa or otherwise. Investigations of Hillary Clinton, former Attorney General Loretta Lynch, Susan Rice, Samantha Power, Fusion GPS, and Debbie Wasserman Schultz would demoralize the Democrats, preoccupy and harass key players, expose criminality, and electrify Trump’s base. Providing Sessions further cover, twenty Republican representatives have sent a letter to the Attorney General and Deputy Attorney General Rod Rosenstein demanding the appointment of a second Special Counsel to look into potentially illegal acts by Clinton, Lynch, and former FBI director James Comey. After recusing himself from the Russiagate investigation, which he knows is pointless, and being “scolded” by Trump, Sessions is now a sympathetic, squeaky-clean figure; even Democrats have expressed support. He has far more latitude to pursue the investigations his boss wants him to pursue. Most of the ensuing criticism will be directed at Trump, which will bother Trump not at all (although there will undoubtedly be answering Twitter blasts). Trump has quietly (when Trump does anything quietly, take note) made two sea changes in US policy in Syria. At the G20 summit, he negotiated a cease fire with Vladimir Putin for southwest Syria. Last week he ended a CIA program that armed Syrian jihadists fighting Bashar al-Assad’s regime. Both changes are anathema to the US Deep State, the mainstream media, and US allies Saudi Arabia, the Gulf States, Israel, and Turkey, yet other than “rote denunciation,” they have been surprisingly docile. The latter change could presage abandonment of a pillar of US foreign and military policy since President Carter supplied arms and other aid to the mujahideen in Afghanistan during their successful fight against the Soviet Union. The US may be out of the business of arming Islamic insurgents against regimes it seeks to change. Deft - by this analysis - as Trump has been, his biggest challenge lies ahead. The government is bankrupt, and demographics will push it ever-deeper in the hole. The global economy is struggling under monstrous and unsupportable debt. Fiat money something-for-nothing has a sell-by date, sooner or later the stock market and economy will head south. Historically, there’s been a tight correlation between stocks, the economy, and presidential popularity. Can Trump dodge this bullet? Here’s another speculative leap: he is already laying the groundwork. He’s claiming credit for the stock market’s rally since he was elected. That may not be as foolish as it seems. When the market and economy falter, he will claim they went up on hopes for his program, and will blame Congress and the Federal Reserve for dashing those hopes. Most people blame the Republican-controlled Congress, not Trump, for the failure to repeal and replace Obamacare. Trump proposes, but Congress disposes and Trump has made sure everyone knows that Congress is responsible. In the same vein, he signed the veto-proof Russian sanctions bill while at the same time excoriating Congress for passing it. He has an easier job making his case than a President whose party controls Congress normally would. Trump is a Republican in name only and ran just as hard against the Republican establishment as he did against Hillary Clinton. Look for him to lambast Congress when it botches tax reform and the debt ceiling. He could be hoping for such miscues. Debt ceiling contretemps may set off financial market conniptions. Trump will sigh and tweet: If only Congress had passed my health care and tax reforms and given me a clean debt ceiling increase, none of this would have happened. If the Federal Reserve continues to raise its federal funds target rate and shrinks its balance sheet, he’ll include Janet Yellen in his tweets. These hypotheses yield testable predictions. Mueller’s investigation will come a cropper, but investigations of high-profile and no sub rosa value leakers and Democrats - up to and perhaps including Hillary Clinton - will lead to indictments and either plea bargained settlements or convictions. Trump will take credit for the stock market until it reverses. He will continue to harshly criticize Congressional failures and blame them when financial markets and the economy head south. This may come to a head if Congress fails to pass a clean debt ceiling increase by the end of September. Trump will also point his finger at the Federal Reserve. This is a high risk strategy, given the longstanding psychological linkage between presidential popularity, the strength of the economy, and stock market indices. It’s probably the only strategy available to Trump. Time will tell if it works. The war in Syria has crested; ISIS, though still capable of substantial mischief, has lost. The refugee flow has already reversed, an estimated half a million refugees have returned, which, as noted in “Powerball, Part Two,” gives European leaders some breathing room. Assad will stay in power unless Russia, not the US, sees fit to remove him. The embers of conflict will smolder for years, but Trump will not be fanning them by arming anti-Assad groups or escalating US military involvement. He will continue to use shows of force and diplomatic maneuvers to try to resolve other hot spots—North Korea, Iran, the South China Sea, Ukraine, Afghanistan—and will shy away from exclusively military solutions. He is deeply displeased with the war in Afghanistan and is calling for a rethink that may ultimately lead to withdrawal. All this is speculative, but it continues a line of analysis whose predictions have been for the most part confirmed. However, borrowing from the ubiquitous financial disclaimer: past performance is no guarantee of future accuracy.
While Draghi shook things up in late June, it appears to be Janet Yellen's flip-flop that has sparked the latest regime shift in global capital markets. Since then, traders' expectations for foreign exchange uncertainty has surged, while the outlook for equity, rate, and oil uncertainty has tumbled. This has left the market now seeing equities as safer than currencies... When are equities safer than currencies? As Bloomberg notes - almost never, at least until now. The one-month implied volatility of the S&P 500 Index is more than a full percentage point below Deutsche Bank’s measure of G-7 currency volatility over the same period, a rare event caused by the combination of a falling dollar and rising U.S. equities. It appears that investors have decided that low-yielding currency returns are riskier than equities, inverting the typical risk/reward relationship.
Authored by Christoph Gisiger via Finanz Und Wirtshcaft, Fred Hickey, editor of the influential investment newsletter «The High-Tech Strategist», warns of trouble ahead for the stock market and spots bright opportunities in the gold sector. Wall Street is in a champagne mood. Last week, thanks to a rally in Apple, the Dow Jones surpassed 22,000 for the first time ever. Nevertheless, Fred Hickey doesn’t share the bubbly vein. The renowned contrarian cautions investors of an unpleasant surprise because central banks like the Federal Reserve are pulling back from their super easy monetary policy. “We could experience a severe market decline or even a crash”, says the outspoken editor of the widely read investment newsletter “The High-Tech Strategist”. A proven expert on the tech sector, Mr. Hickey makes out similarities to the excesses during the dotcom bubble and warns that dizzy valuations in large cap tech stocks and the boom in the ETF space are stirring up an explosive cocktail. He finds shelter in gold and gold mining stocks, which he thinks will have a bright future. Mr. Hickey, the Dow Jones is hitting one record after another. What’s going to happen next? We are in a giant bubble. It’s already the third bubble in the last two decades. First we had the tech bubble in the late nineties, then we had the housing bubble that lead to the global financial crisis of 2007/08 and now we’re in bubble number three. All of them are of the same cause: central banks. Since the beginning of this bubble, we have seen a total of $12 trillion of money printing and in the first five months of this year central banks were printing at record rate of $3 trillion per year, up from around $2 trillion a year. So even though the Federal Reserve stopped printing, the other central banks continued. That’s the reason why we have all this insanity in the financial markets. Now, the Fed aims to make another big step in normalizing monetary policy and start shrinking its bloated balance sheet. How is this going to work out? The central bankers claim that they will be able to pull back and normalize interest rates without causing any difficulties. It will be like watching paint dry, Fed chief Janet Yellen says. However, the big problem is that it was their money printing that started this bull market off. It was the Fed’s money printing in 2008 that kicked off what resulted in almost a quadrupling of the US stock market. So how do you think you are going to get ever out of that? How can central banks pull back and it’s not going to have an impact when it’s their money printing that is responsible for this rally in the stock market? It’s a pipe dream. But they are going to try. They have to make an attempt to normalize monetary policy and that will likely lead to some sort of severe market dislocations. So as we head into the famous September and October period, we will likely get some kind of problem. What kind of stocks are going to be most vulnerable? For instance, tech stocks have been on an astonishing run this year which brings back memories of the dotcom craze. There are similarities and dissimilarities. The bubble at the end of the nineties primarily focused on tech, media and telecom stocks. Aside from that, all the value stocks were neglected. So there were still places where you could invest. You could also go into treasury bonds because they were paying a decent yield back then. Today’s madness is much broader. We have bubbles everywhere: in high yield bonds, in real estate all over the world, from China to Australia to Canada, as well as in stock market valuations that are insane. Almost all asset prices are up and it isn’t justified since we are witnessing the worst economic recovery since the Great Depression. Also, the amount of debt is different. The financial crisis was all about debt and when you have a crisis like that what you generally do is you reduce debt. But the central banks came in and the policy to solve the problem was 50% more debt. That’s not going to work. And what’s similar to the dotcom bubble? What’s similar is the insane valuation of some stocks in the tech world. Just look at the so-called group of FANG stocks: Facebook, Amazon, Netflix and Google. The cheapest of those stocks is Google with a P/E ratio of more than 30. But Google isn’t growing anywhere near that rate. Then you look at Amazon which trades at 200 times earnings. In the case of Netflix the valuation is even higher albeit the company actually burns an enormous amount of cash. So you have the same kinds of crazy valuations today that you had in the late nineties. What’s more, big tech caps like Apple, Google and Facebook are carrying the whole stock market. How healthy is that? This tells me it’s a very narrow market. When everyone is piling into a small number of stocks and the breadth of the market starts to the deteriorate like this it’s oftentimes a red flag before the market declines. We’ve seen that before. The other thing that’s causing this great concentration into the largest tech stocks is the ETF phenomenon. What do you mean by that? Many investors got burned badly during the turmoil in 2000 and then again in 2007/08. Because of that, they gave up on active money managers and went into ETFs. That’s why you have this huge stream of money out of active managers into passive investments and into ETFs. But the problem is that all the ETFs are investing in the same stocks. So the more money that goes into ETFs the more money goes into stocks like Apple, Amazon and Facebook. That lifts these stocks further up and they attract even more ETF money. That’s the cause for this pyramid effect which is very dangerous. Why is this so dangerous? Despite all the money printing, central banks haven’t outlawed the business cycle and they haven’t outlawed recessions. The bull market and the economic expansion in the US are already very old. So what’s going to happen when the selling occurs? One problem is that ETFs don’t hold any cash and when the market starts to fall, we are going to see huge outflows. There is no cash cushion because there will be no buying from ETFs. So everything is set up for a reversal: You have tremendous over valuations in these stocks and the looming possibility that all of a sudden the floor is falling out from under the market. At the same time you have the Fed and other central banks trying to “normalize” monetary policy by either raising interest rates or by pulling back on their balance sheet. So it’s basically tick, tick, tick and the only question is when the bomb is going off. What’s going to happen when the big bang comes? History shows that all these tech stocks will lose a lot. Microsoft and Google are probably the ones which would hold up best but the most vulnerable ones are those which have to highest valuations. For instance, as great as a company Amazon is, it got clobbered in 2008. The stock lost 65% of its value in just three to four months. That could happen again and Amazon would still be trading at a P/E ratio of almost 70 and therefore would still be tremendously overpriced. A stock like Tesla could even lose 95% or 100% as it happened to those kinds of companies in 2000/02 that don’t make any money – and I don’t know about Apple. Apple’s stock just got another boost after the company quelled some concerns about potential delays regarding the launch of its 10th-anniversary iPhone. Some people – I call them Appleholics – will buy anything new from Apple. If Apple brought out a dishwasher they would buy it. So if Apple brings out another iPhone they are going to buy it no matter what, even if it has no new features. That will give the company a bump in sales at the end of this year and into next year. But then what happens next? So far, investors seem quite optimistic. The vast majority of Apple’s profits comes from one product and that’s the iPhone. But in most parts of the world, the market for smartphones is saturated now. So the problem with Apple is what do they do for an encore after the iPhone upgrade cycle peaks early next year? It’s hard to justify the more than $800 billion market cap that Apple’s stock currently carries when the only new thing that Apple has built in the past five and a half years since Steve Job’s death is its swanky $5 billion new headquarters. So because of the new iPhone generation you are going to get an upgrade cycle that will last a few quarters. But then it’s over and if that’s the case the market will anticipate it and investors will be exiting stage left since it will be clear to everyone that there isn’t anything else there. Are there any safe spots in the tech sector at all? Semiconductor equipment makers. They are benefiting from an increase in general spending among their traditional customers. Additionally, there is a huge push by China to establish its own domestic semiconductor industry. That’s very bad news for the western semiconductor manufacturers, especially for memory chips makers like Western Digital and Micron Technology because you have this huge Chinese players which are backed by the government. It will be worse than when Japan and Taiwan came into the market. But the point is that there is a lot of business coming to the way of semiconductor equipment manufacturers over the next years. Some of the best companies in that business are Applied Materials and ASM International. But then again, you want to be cautious. It’s a dangerous moment in the stock market right now and nothing goes up when things go down. In the investment community, you are well known as a contrarian. How do you position yourself in this raging bull market? Actually, it’s a lot easier than you might think. That’s because I have an been in a bull market since 2002 and that’s gold. I was lucky enough to have missed the twenty year bear market in gold before that since I had no interest in metals at that time. My interest was in technology as it should have been. But then I was forced into the gold world because the central banks and particularly the Federal Reserve started their radical experiments, first with very low interest rates and then with large scale money printing. So I realized that should be good for gold and there should be a long secular bull market in gold – and it has. That’s why it’s easy. Then again, since the peak of 2011, gold has lost a little bit of its shine. You have to understand that since the beginning of the bull market in 2002, gold has grown at 10% on average per year. That is better than the S&P 500. Of course, we had a peak in 2011 and then we had a cyclical bear market within what I consider to be a secular bull market in gold. Was it easy to endure that? No, but it allowed me to buy things at very low prices. And just as the last secular bear market in gold lasted for 20 years this secular bull market is going to be just as long. Also, looking at all the historical work, I found out that there is sort of a Yin and Yang relationship between technology stocks and gold. When gold goes down tech stocks go up and vice versa. So If you think the stock market is a very dangerous place to be right now, a very good place to be is in gold. And that’s where I am today. So how exactly are you positioned? The gold price is close to breaking a long-term downtrend. But despite that, there is no interest in gold right now. For instance, at the US mint they’re shipping gold coins at the lowest rate in 10 years. So just as this is an extraordinarily dangerous moment in the tech world and in the overall stock market it is just as an extraordinary moment being long gold and especially the gold mining stocks. Which miners do you favor? What I think it’s going to happen is that gold is going to go up several thousands of dollars. So even if it’s not wanted today it will be when the secular bull market picks up again. In a gold bull market almost all the gold stocks will rise. However, there are higher-quality names and others. With respect to that it’s very important where a company’s mines are located. Many parts of Africa and South America are politically unstable and governments can be possessive towards mining companies. South Africa is a current example and Tanzania another one. What’s more, the Fed’s and other central bank’s money printing have encouraged many of these emerging markets countries to take on enormous amounts of debt and I’m sure they are going to grab whatever assets they can get. That’s why you don’t want to be in those locations. What are better quality names then? If you’re in Canada, Australia, Finland, Mexico or in the US you are in places where there is law and order and respect for property rights. So in contrast to the big herd in the stock market I don’t own the bubble FANG tech stocks. But I’m involved in a group of alternative FANG stocks, the gold FANGs: Franco Nevada, Agnico-Eagle Mines, New Gold and Goldcorp. That’s a list off FANG stocks that is a little bit different than the FANG stocks everybody is talking about. What makes these mining stocks so attractive? During the secular bear market in gold which ended in 2002 prices had been suppressed for so long that company managements had to get lean and mean. They had to reduce their expenses to survive. So when the secular bull market started, their earnings went up dramatically higher than the price of gold and those mining stocks had a 1600% run. Today, conditions for these companies are similar as in 2002. During the last few years, we have been going through this cyclical gold bear and the mining companies have been under tremendous pressure once again. Now, there is a tremendous amount of leverage on their bottom line when gold kicks in into higher gear again. I think it will be soon and the fact that these stocks are so hated, underowned and underpriced makes me even more excited about the moment we are in right now.
There’s a strange thing about Central Bankers… When they are working at a Central Bank, they never see financial problems, even if said problems are both MASSIVE and obvious. As Fed Chair in 1999, Alan Greenspan claimed it was impossible to know if stocks were in a bubble … when stocks were in their single largest bubble in 100 years. The next year, the market crashed. As Fed Chair in 2007, Ben Bernanke claimed the subprime mortgage meltdown was “contained” and the effects would not “spillover” into the economy. The next year the market crashed as the economy imploded. And this year, Fed Chair Janet Yellen announced that there wouldn’t be another financial crisis in our “lifetime.” We’ll see what comes next year. Actually, we KNOW what’s coming, because for whatever reason, as soon as a Central Banker leaves the Fed, he or she suddenly changes their tune and starts telling the truth. On that note, former Fed Chair Alan Greenspan issued a crystal clear warning on Friday. Former Federal Reserve Chairman Alan Greenspan issued a bold warning Friday that the bond market is on the cusp of a collapse that also will threaten stock prices. In a CNBC interview, the longtime central bank chief said the prolonged period of low interest rates is about to end and, with it, a bull market in fixed income that has lasted more than three decades. "The current level of interest rates is abnormally low and there's only one direction in which they can go, and when they start they will be rather rapid," Greenspan said on "Squawk Box." Source: CNBC Greenspan’s had a decent record of honesty in the last few years, noting that excessive debt is the root of the financial system’s and that the reintroducing the Gold Standard would solve many of our current problems. Again, the former Fed Chair seems to have “got religion” when it comes to finance. And he’s now issuing a major warning that the bond market is in serious trouble. He’s not wrong either. Globally the Bond Bubble has reached truly astonishing levels. The world has added $68 TRILLION in new bonds to the debt markets since 2007. As a result of this, today the world’s Debt to GDP ratio is s staggering 327%. All of this new was issued based on assumptions that interest rates would remain at or near ZERO. So what happens to all this debt when yields start rising, bond payments increase, and borrowers start defaulting? For more insights that can help you see serious returns from your investments, join our FREE daily e-letter, Gains Pains & Capital. Every weekday you'll receive our research reports before the market's open. In the last 6 months we've called the massive sell-off in the $USD, the out-performance by Emerging Markets, and more. And best of all, it's 100% totally FREE. To join us, swing by: http://gainspainscapital.com/ Best Regards Graham Summers Chief Market Strategist Phoenix Capital Research
Authored by David Stockman via The Daily Reckoning, Here’s a comparison that is surely vertigo inducing. On the one hand, the financial system is implicitly held to be so incredibly stable and healthy that volatility on the S&P 500 has been driven to 50-year lows. Indeed, that lovely condition is apparently expected to persist indefinitely as signaled by implied volatility. During the last 6,000 trading days (since the early 1990s), the VIX Index closed below 10 on 26 occasions or just 0.4% of the time. No less than 16 out of those 26‘below-10’ closes occurred in the last three months! Yet this insensible bullish calm is happening even as Wall Street is showing itself to be in the throes of unhinged leveraged speculation. With respect to the unhinged part, consider an incisive post by Wolf Richter on the present carnage in the retail sector. His point was that virtually every one of the rash of companies filing bankruptcy in the sector during the recent past had been strip-mined by private equity operators: Nearly every retail chain caught up in the brick & mortar meltdown is an LBO queen – acquired in a leveraged buyout by a private equity firm either during the LBO boom before the Financial Crisis or in the years of ultra-cheap money following it. But Richter’s real point is that the private equity operators in the retail space brought down a double-whammy of leverage on the companies they ransacked. That is, they first loaded up the companies with buyout debt, and then came back for second and third helpings. Accordingly, since 2010, retail chains controlled by private equity firms issued $91 billion in junk bonds and leveraged loans. Needless to say, in drastically falsifying debt prices in order to stimulate housing and other investments, the Fed had no clue about the collateral effects of its massive and persistent intrusion in the delicate clockwork of capital markets pricing. So when Janet Yellen & Co profess to see no bubbles they prove their own clueless incompetence. Do they actually think that this would happen in a free market with honest money and market-clearing interest rates? The question answers itself. In fact, the asset stripping pattern is every bit as irrational and toxic as were the slicing and dicing of subprime mortgage pools in the run-up to the 2008 financial crisis. Needless to say, so-called “investors” piled into the flood of dodgy paper because they were desperate for yield. In the dollar fixed income markets, $3.5 trillion of the Fed’s U.S. Treasury and other securities purchases after September 2008 drove real interest rates so low that it virtually forced money managers to scramble out the risk curve in order to find minimally attractive yields. So doing, they enabled strip-mining transactions that resulted in the eventual destruction of the debt issuers and vast windfall distributions to a few hundred corporate kingpins. What possessed institutional investors such as state pension funds to invest in such shaky operations? The answer to this seeming mystery is simply that institutional investors have been completely corrupted by the casino environment that has resulted from three decades of Bubble Finance. In clamoring for yield, institutions have been induced to embrace sweetheart deals for the kingpins that would be laughed out of court in an honest market. For example, Payless Inc, which was a shoe retailer with 22,000 employees and 4,000 stores, filed for bankruptcy last April. That was less than five years after its original $670 million LBO in 2012. But it was not at all surprising since the company was heading for the wall from the get-go. But the Payless bankruptcy was apparently dismissed as a victim of bad luck and timing. I don’t think so. The two LBO firms that did the deal — Golden Gate Capital and Blum Capital Partners — are serial asset strippers and crony capitalist rip-off outfits. The latter was founded in 1975 by one Richard Blum of San Francisco. He is a classic crony capitalist who parlayed his contacts in the world of California and national democratic politics — ranging from Jimmy Carter to his wife, Senator Diane Feinstein, into billions of funding from political controlled institutions. Thus, upwards of $1 billion in capital was supplied to Blum’s fund by the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the Los Angeles County Employee Retirement System, among others. That Blum served as a long-time regent of the giant University of California System is surely not coincidental. Nor is the fact that his fund was among a pack of hedge fund jackals that ran up the stock prices of for-profits education companies to absurd heights based on growth momentum that was totally unsustainable. In fact, these outfits harvested hundreds of billions of student loans from hapless enrollees — of which 33% of the tuition proceeds went to selling bonuses and expenses, 33% to operating profits and the left-overs to the purported cost of education. Needless to say, the ranks of veterans and blue collar youth were soon populated with debt serfs living in mom and pop’s basement, where they spent their time dodging loan collectors and looking for part-time gigs that rarely paid a fraction of what had been advertised by the for-profit tuition salesmen. But Richard Blum is not unique. As described by Wolf Richter, crony capitalism is an equal opportunity patron. In case the fees and dividends were stripped out by Bain Capital — the outfit started by Mitt Romney, and which retains the deep political ties which have opened the door to billions of institutional money. These considerations pose an obvious question. Why in the world were there so many retail LBO’s in recent years when anyone could see the scorched earth juggernaut of Amazon barreling down the pike? After all, it is no secret that during the last decades its sales have grown by 1,100%. And that it has laid waste to whole sections of the retail market in the process of this unprecedented expansion. The answer is that the capital markets are deeply and perhaps irreparably broken by the Fed’s massive falsification of financial asset prices. Not only was the Amazon threat well known, but so was the fact that U.S. brick and mortar retail was drastically overbuilt — and mainly because so much cheap debt had flowed into the commercial real estate market. But there is no way to reconcile that leveraged finance boom with current projection that nearly 30,000 retail stores will close in the coming three years. The latter is not happening by the economic equivalent of immaculate conception. It has been baked into the cake all along — the inherent consequence of systemic financial repression by central banks. There is another thing baked into the cake as suggested above. Namely, all this financial engineering has starved the real main street economic for capital investment — even as the cash flows shunted back to Wall Street have showered the fast money operators and gamblers with massive windfalls. That is, the chart below isn’t a consequence of Reagan/GOP tax cuts. It measures the pre-tax distribution of U.S. income, and the monumental “trickle-up” to the top 1% of households was born and bred in the Eccles Building. At the end of the day, the retail sector has been hit with a triple whammy owing to monetary central planning. First, the Amazon grim reaper is not an instrument of “creative destruction.” It’s a giant engine of predatory pricing and malinvestment enabled by an unhinged casino that is absurdly valuing its net income at 190X. Secondly, the resulting prematurely broken economic furniture and deadweight economic loss has been compounded by decades of over-investment in malls and other retail venues. In the face of huge fixed operating and debt costs, the collision of Amazon and these egregiously excessive levels of brick and mortar capacity is pushing retail pricing and margins to sub-economic levels. That is, negative cash flows are signaling a need for tsunami of bankruptcies, job-layoffs and store liquidations that significantly exceed the fundamentals of the sector. Finally, the scramble for yield among money managers has fostered the financial liquidation of retail sector equity for the sole purpose of redistributing windfalls to the top of the economic ladder. Despite all that, Keynesians like Fed Vice-Chairman Fischer are still wondering, unaccountably, why trend economic growth has sunk to the sub-basement of history and why outlaw politicians like the Donald are suddenly arising to disrupt the perfect nirvana of the central planners’ statistical full employment. Here’s a hint: look at the brick and mortar retail industry.
From Steven Englander of Rafiki Capital Even when non-farm payrolls (NFP) are as neglected and downplayed as this time around, you have to ask yourself what it would take to make them meaningful. The reason for the markets disinterest is that no one thinks the Fed is going to raise rates earlier than December and we have four more payrolls releases beyond tomorrow's release before they have to decide. And even though Janet Yellen has been certified as a ‘low interest-rates person’ she is unlikely to cut rates any time soon. We have only one additional release before the expected balance sheet reduction announcement. But it would take a lot to put some uncertainty into the balance sheet shrinkage . Especially because claims have been extremely stable at extremely low levels, no one will trust an isolated softish NFP number. The consensus on NFP is 180k. That said, below 130k and with some soft survey indicators softening, I think investors get nervous. It's a bit awkward for the Fed, having told us that balance sheet reduction won't do any damage. But say we get two 130k prints on NFP this month and next, they may very well decide that a brief delay is prudent and that 'relatively soon' extends well beyond September. So 130k or lower on Friday means you have to worry a bit that the labor market is coming off the rails. Anything above 150k seems plenty good enough to go ahead with balance sheet reduction. Bond yields may come off a bit more if we print below 160k even though that is good enough to get balance sheet reduction going. What about a good result? Problem is we have strong NFP recently and the 180k consensus suggests that a firm labor market is priced in. So 250k on its own is not enough to put a September hike on the calendar but it could firm December odds slightly. I am skeptical that hourly earnings are enough to turn things around on their own. Most forecasters are aware of the calendar issues so the consensus reflects this. The question is whether an 0.4% is enough to change perceptions. Aberrations happen -- 0.3% m/m is pretty common, especially in months when the 12th and 15th are in different weeks. Over the last couple of years we have gotten one or two 0.4% m/m prints annually without it being a signal of a real rise in wages. Wage acceleration is a slow moving process, so it is more likely to be signaled by a small shift up ward than a big inflation runup. However, 0.5% would be hard to ignore since it was last seen in 2008. There have been more sighting of carrier pigeons, and many more of Elvis, recently. With some trepidation, I would argue that 180k on NFP and 0.4% m/m on wages are a fade. There are too many investors wanting to buy EUR and sell USD so any price move would be seen as a USD selling opportunity. However, if we get a 250k and an 0.4% (or higher) the effect could be longer lasting. If it looks like boom time in labor markets, it makes sense that there be spillover into wages. Whether this would be good enough to reverse the USD trend is doubtful – we would need other confirmatory data. But it would make it a two-way market in FX and fixed income. The UR matters much less than usual, given the shifting around of NAIRU views among policymakers. Deep down, investors understand that it is convenient for the Fed to now have NAIRU estimated 0.25-0.5% above the current unemployment rate but no one really believes these estimates, given their fluidity. For the record, I am looking for 160k on NFP and 0.3 or 0.4% on hourly earnings and 4.3% on the unemployment rate. This would generate a bit of a chopfest, with markets trading erratically, but I think USD would end up lower.
Authored by Tho Bishop via The Mises Institute, When Janet Yellen testified before the House Financial Services Committee last month, she faced grilling on a topic that hasn’t received enough mainstream attention: the interest being paid on excess reserves at the Fed. While the topic has come up occasionally since the program began in 2008, it is worth noting that Yellen was pushed by both Jeb Hensarling, the committee chairman, and Andy Barr, the chairman of the Monetary Policy Subcommittee. While ending this taxpayer subsidy to Wall Street is important, it’s also important to understand the dangers posed by allowing these excess reserves to be lent out of major financial institutions. To understand what is at stake, recall back to 2008 when many Fed observers were concerned about the inflation dangers posed by the policies of the Bernanke Fed. In a six year period, the base money supply increased over four-fold. Understandably, this sparked grave fears about the devaluation of the dollar - fears that, to date, have yet to really present themselves in the CPI. While stock prices, real estate prices, and other types of asset-price inflation are likely being fueled by this monetary policy, the Fed isn’t facing political pressure from inflation concerns - but rather being grilled by misinformed legislators for not reaching their (unfortunate) 2% inflation target. This is, in part, due to the fact that a lot of this new money has been kept sterile by being parked within the Fed itself as excess reserves. Today, more than $2 trillion worth of these reserves are parked at the Fed, which means that only two thirds of the newly created money has actually been pumped into the “real economy.” Now this policy should rightfully puncture the narrative that the Fed was at all concerned with providing liquidity to businesses on Main Street (i.e., not big banks). After all, if the aim of the various rounds of QE was to get banks to loan, then paying them not to is irrational. Instead, the Fed was using taxpayer dollars to subsidize the very same banks that they just bailed out. We are continuing, to this day, to pay banks to not make loans. While Bernanke repeatedly dismissed the problem of incentives posed by paying 25 basis points on these reserves, the reality is that this was a risk-free investment at a time of great market volatility. Considering that several important banks had issues passing the Fed’s stress tests - tests are designed to exaggerate the stability of the financial sector - it doesn’t require a great logical leap to suggest that the Fed misrepresented this program to public in the name of “stabilizing” the financial sector. In 2016, this policy paid $16 billion to big banks, a number that will likely rise as the interest rate payments go up with every increase in the federal funds rate (we are now paying 1.25% interest, higher than the public can receive from their own banks.) While both the public and Fed critics on Capitol Hill should be outraged at this clear example of cronyism, simply ending it is not enough. After all, the danger of refusing to pay ransom money is that the ransomer will follow through on their threat. If the Fed was to simply stop payment on these funds, and banks decided to lend it out — then $2 trillion would be injected into credit markets. Given the amplifying effects of a fractional reserve banking system, it’s easy to see how quickly this could unleash severe inflationary pressures. So this is the true policy issue going forward, how do you stop the taxpayer subsidy to Wall Street while avoiding lighting the fuse to Bernanke’s inflation bomb? One way would be to increase reserve requirements. Currently banks with over $115.1 million in liabilities have to keep 10% at the Fed, by raising that number up you will not only serve to keep this expansion of the monetary base “sterile,” but will make the banking sector as a whole more stable.
Authored by Lena Komileva, originally posted at The Financial Times, The US Federal Reserve raised rates for the third time in six months in June, even though inflation had stayed below its 2 per cent target for much of the past decade. Why? The justification lies with the return to “economic normalisation” (a more normal US growth and credit cycle), a reflationary global environment and easy financial conditions all combining to banish the extreme “tail risks” of a deflationary slump that followed the financial crisis. Yet markets have been reluctant to heed the call of a return to more normal monetary conditions. Having lagged behind the Fed’s rate tightening and the discussion on shrinking its balance sheet this year, investors are still uncertain about the chances of another — well telegraphed — rate rise this year. A less than 40 per cent probability is attached to this in the fed fund futures market. Investors have also yet to contemplate the effects of a tapered Fed balance sheet for asset markets - from the cost of funding in US money markets and the shape of the yield curve to stock market volatility. The repeated bouts of bond market tantrums in response to virtually unchanged central bank messaging about removing the liquidity “punch bowl” underline just how unprepared markets are. Central banks have taken note. The concerted policy message in the past couple of months has been to caution about complacency in global market valuations, as reflected in unusually low risk premia across assets and geographies. The Bank of International Settlements warned on June 24 that markets have become “irrationally exuberant”, resulting in ever more risk-taking — fed on a diet of high liquidity, inflated asset prices and depressed market rates — causing investors to ignore rising debt ratios and political risks. In its latest Financial Stability Report, the Bank of England said “very low long-term interest rates make assets vulnerable to a re-pricing, whether through an increase in long-term interest rates, adjustments to growth expectations, or both”. Fed chair Janet Yellen has also hinted at an overextended financial cycle, noting rapid growth in stock market valuations that look “rich” by historical standards. European Central Bank President Mario Draghi also signalled that the balance of risks surrounding the eurozone have shifted away from deflation, which leaves bonds looking expensive. The risk premium on European high-yield bonds over German Bunds has fallen to the lowest since 2007, matching levels that preceded the global financial crisis. In a nutshell, central banks are not necessarily turning more hawkish, in defiance of their inflation stability mandates. Rather they are clearly signalling that investors are becoming far too complacent about the policy outlook — and that risks financial stability. This decoupling between economic and financial cycles is where crises are born. It is worth remembering that the last major economic shock came from financial excess in a controlled inflation environment. The Fed’s preferred core PCE (personal consumption expenditures) inflation gauge averaged 2.1 per cent between January 2007 and December 2008. But this was not a harbour of economic stability. The effects of a globalised debt explosion, a slump in productivity and perceptions of inequality have altered the socio-economic map of major economies, and the political environment in which central banks operate. The prospect of higher debt and weak productivity growth reducing economic resilience to a financial cycle downturn is now a bigger worry for central banks than a bout of inflation softness. So frothy market valuations, based on investors’ expectations of an indefinitely easy policy outlook, have forced worries about financial stability into the growth-inflation mix that has so far dominated the central bank debate. That, in turn, has tilted the balance in favour of central banks tightening through the current soft inflation patch. However, when it comes to the Fed policy outlook, market expectations remain unrealistically dovish. Ms Yellen’s choice to communicate cautiously has avoided causing a “taper tantrum” in the markets. But this has not prevented the Fed from delivering three rate hikes and moving towards commencing “quantitative tightening”, by shrinking its balance sheet, faster than consensus has expected in the past year. Fed policymakers sent a clear message last week that they are not inclined to delay an announcement on when it will begin unwinding its multi-trillion dollar balance sheet simply because of the softness in inflation. That bond yields should fall in response to the Fed’s message - just as the dollar depreciation continues and key commodities, such as oil and copper stage impressive rallies - will only strengthen the Fed’s confidence in proceeding with removing the emergency stimulus. It’s time for markets to catch on.
Via MauldinEconomics.com, It is increasingly evident that the US economy is not taking off like some predicted after the election. President Trump and the Republicans haven’t passed any of the fiscal stimulus measures we hoped to see. Banks and energy companies have got some regulatory relief, and that helps. But it’s a far cry from the sweeping healthcare reform, tax cuts, and infrastructure spending we were promised. Serious, major tax reform could postpone a US recession to well beyond 2020, but what we are going to get instead is tinkering around the edges. On the bright side, unemployment has fallen further, and discouraged workers are re-entering the labor force. But consumer spending is still weak, so people may be less confident than the sentiment surveys suggest. Inflation has perked up in certain segments like healthcare and housing, but otherwise it’s still low to nonexistent. Is this, by any stretch of the imagination, the kind of economy in which the Federal Reserve should be tightening monetary policy? No - yet the Fed is doing so. Making Up for Past Mistakes It’s partly because they waited too long to end QE and to begin reducing their balance sheet. FOMC members know they are behind the curve, and they want to pay lip service to doing something before their terms end. Plus, Janet Yellen, Stanley Fischer, and the other FOMC members are religiously devoted to the Phillips curve. That theory says unemployment this low will create wage-inflation pressure. That no one can see this pressure mounting seems not to matter: It exists in theory and so must be countered. The attitude among central bankers, who are basically all Keynesians, is that messy reality should not impinge on elegant theory. You just have to glance at the math to recognize the brilliance of the Phillips curve! It was Winston Churchill who said, “However beautiful the strategy, you should occasionally look at the results.” Fact is, the lack of wage growth among the bottom 70–80% of workers (the Unprotected class) constitutes a real weakness in the US economy. If you are a service worker, competition for your job has kept wages down. It Will Backfire in a Big Way The risk here is that the Fed will tighten too much, too soon. We know from recent FOMC minutes that some members have turned hawkish in part because they wanted to offset expected fiscal stimulus from the incoming administration. That stimulus has not been coming, but the FOMC is still acting as if it will be. What happens when the Fed raises interest rates in the early, uncertain stages of a recession instead of lowering them? I’m not sure we have any historical examples to review. Logic suggests the Fed will curb any inflation pressure that exists and push the economy into outright deflation. Deflation in an economy as debt-burdened as ours is could be catastrophic. We would have to repay debt with cash that is gaining purchasing power instead of losing it to inflation. Americans have not seen this happen since the 1930s. It wasn’t fun then, and it would be even less fun now. Worse, I doubt Trump’s FOMC appointees will make a difference. Trump appears to be far more interested in reducing the Fed’s regulatory role than he is in tweaking its monetary policies. Let me make an uncomfortable prediction: I think the Trump Fed—and since Trump will appoint at least six members of the FOMC in the coming year, it will be his Fed—will take us back down the path of massive quantitative easing and perhaps even to negative rates if we enter a recession. The urge to “do something,” or at least be seen as trying to do something, is just going to be too strong.
By replacing low-wage cashiers and other retail workers with robots, the retail sector’s struggling companies can engineer a potentially life-saving boost in profits. But as advances in artificial intelligence continue to accelerate, according to the World Economic Forum, large swaths of laborers are going to lose their jobs, leading to unprecedented levels of unemployment. How to distribute the profits that will accrue to corporations thanks to this paradigmatic shift in labor-market conditions has been the subject of intense debate, as it has the capacity to create a sharp drop in living standards across developed economies. So how can governments ameliorate this diminution of the American workforce? The WEF has an idea: Tax the robots and use the proceeds to fund a universal basic income for all Americans. As the paper notes, the once-controversial UBI has never been more poplar, thanks to tech luminaries like Mark Zuckerberg, Elon Musk and Bill Gates – all of whom have spoken in glowing tones about the policy’s potential to save America from dystopia. Yet, for all this talk, Zuckerberg & Co. have glossed over a crucial question: How, exactly, will taxpayers afford this? The WEF says it looked to the private sector for answers, and came up with this simple conclusion: Tax the robots. “Companies will profit significantly from workforce automation,” WEF writes. “So the private sector will be able to afford shouldering this burden, while at the same time still making greater profits.” The WEF cites a small, yet successful, experiment that was conducted in the UK, and Ontario, as justification for its plan, which it fleshes out in greater detail below: “As the robots take over, people will begin to lose their jobs, but companies will be fine. More likely than that - they’ll thrive. The profits generated from automation could be used to pay a basic wage to those displaced by robots. To use the welder example from before, a company could slash the cost of their production by at least a third in a short period of time, and would continue to see greater profits as efficiencies increase and the price for parts drops. If that company eventually arrives at the $2 an hour mark that BCG predicts, the company’s bottom line would have been improved by 1250%. Given all of the savings and massive profits companies are going to reap from these new technologies, they should be responsible for using part of this monetary kick-back to help the workers they’ve displaced. Legislators might consider a sliding-scale automation tax, where a company qualifying itself as using an automated workforce would be taxed depending on how many human workers they have performing tasks compared to how many tasks are performed by automated workers that a human could rightly do. This money could then be put into a UBI fund that is then distributed by the government to citizens affected by automation—or to the entire population.” While startup costs associated with building a robotic workforce might appear daunting, the WEF notes that they’ve fallen sharply in recent years, and will likely continue to decline as advances in AI technology sharpen robots’ ability to work side-by side with humans. Some of the largest some of the largest food-service and retail companies have announced initiatives centered around providing customers with a more seamless shopping experience. Cowen's Andrew Charles, the analyst calculates the jump in sales at McDonald’s as a result of the company's new Experience of the Future strategy which anticipates that digital ordering kiosks (shown above) will replace cashiers in at least 2,500 restaurants by the end of 2017 and another 3,000 over 2018. This trend will only continue to accelerate. McDonald’s, an early pioneer of automation, is already replacing human workers with automated kiosks. They expect a 5% to 9% return on investment in just the first year; in 2019 they expect this return to balloon to double digits. And this is only one sector: PricewaterhouseCoopers estimates that 38% of US jobs will be in danger of being replaced by automation by 2030. To this, WEF adds that Micky D’s expects a 5% to 9% return on investment in just the first year; in 2019 they expect this return to balloon to double digits. Amazon.com’s nearly $14 billion acquisition of Whole Foods Market has spurred (long overdue) calls from a handful of Congressional Democrats for an investigation into Amazon’s business practices on anti-trust grounds. Over the past few years, the company’s push for speedier delivery times (it offers same day delivery in certain markets through its Amazon Prime service) and an increasingly expansive away of products is devastating smaller retails and brands. Some smaller retailers, having ascertained the existential threat Bezo’s blatantly monopolistic business practices pose, have started to push back, setting the stage for a full-scale battle between Amazon and its smaller rivals. In an email sent to authorized retailers, the CEO of Birkenstock USA threatened to cut off any retailers who violate the company’s strict policies surrounding reselling by turning over their stock to Amazon. The e-commerce giant has allegedly been reaching out to individual Birkenstock retailers, offering to buy out their entire stock at full price. Amazon has denied these claims. Already, retail bankruptcies have surged 110% in the first half of this year, according to a report by Fitch as retail surpasses battered energy as the most distressed industry in the US. Unfortunately, US officials aren’t treating the problem of creeping automation with the deference that the WEF says it deserves. Case in point: “At the exponential rate of robotization, there isn’t a lot of time for legislators to figure out the intricacies of a solution - but they don’t seem to be in too much of a rush. Steven Mnuchin, the US’s treasury secretary, is already completely ignoring this issue, for example.” Fed Chairwoman Janet Yellen acknowledged the severity of the problem during her Congressional testimony following questions from two Republican senators. To be sure, the Fed doesn’t have the authority to raise taxes (though it could easily choose to monetize these handouts by agreeing to buy more government bonds). Stagnant wages, worsening labor-force participation and expanding deflationary prices have been linked by economists to increasing automation. In a recent study, PricewaterhouseCoopers estimates that 38% of US jobs will be in danger of being replaced by automation by 2030.
Как и ожидалось, члены совета управляющих Федрезерва США проголосовали за повышение процентной ставки на 0,25 процентного пункта по итогам двухдневного заседания. Базовая процентная ставка выросла с 0,75–1% до 1–1,25%.
Ставка на технологии и на покупку технологий. Об этом говорил Владимир Путин на съезде "Деловой России". Обсудим тему и с генеральным директором Агентства по технологическому развитию Максимом Шерейкиным. Нефть по 50-60: именно такой диапазон Саудовская Аравия назвала достаточным и для бюджета и для развития мировой экономики. Джанет Йеллен дала пищу для ума. Послушав главу ФРС, Bank of America советует перекладывать деньги из облигаций – в реальные активы.
Zerohedge.com: Йеллен говорит, что скупка акций – это “хорошая вещь, о которой стоит подумать”, и эта мера может помочь в случае рецессии
Намекнув прошлым вечером о том, что “возможно, в будущем” Федрезерв мог бы начать скупать акции, Джанет Йеллен опять проболталась, подтвердив, что Федрезерв рассматривает возможность скупки прочих активов, помимо долгосрочного долга США. Несмотря на полный и оглушительный провал политики Национального банка… читать далее → Запись Zerohedge.com: Йеллен говорит, что скупка акций – это “хорошая вещь, о которой стоит подумать”, и эта мера может помочь в случае рецессии впервые появилась .
Глава ФРС США Джанет Йеллен объявила о сохранении базовой процентной ставки в диапазоне 0,25–0,5%. При этом были снижены прогнозы по ВВП и инфляции в американской экономике, а также прогнозы дальнейшего повышения процентных ставок.
Руководство Федеральной резервной системы США объявило о повышении базовой процентной ставки на 0,25%.
Американская экономика "в значительной степени восстановилась" после Великой рецессии, и готова продолжить рост на фоне укрепления инфляции - таким был посыл главы ФРС Джаннет Йеллен, которая в своем вчерашнем выступлении постаралась максимально подготовить рынки к первому пов читать далее…
В руководстве Федеральной резервной системы рассматривают возможность использования отрицательных процентных ставок, в случае если американская экономика вновь столкнется с серьезным кризисом.
Оказывается, пока все на статую пялились кафедры ООН да на Сирию смотрели из фондов взаимных инвестиций США вывели 63 $ млрд (за последние 3 месяца) Инвесторы боятся всего, изменения процентной ставки ФРС, апокалиптической турбулентности и нестабильности... "биржевой зверь болен, и паника вот-вот поглотит мир" (цитата из одного из "срочников" на форуме выживальщиков)).Факт тот, что бежать инвесторам некуда (только в нефть)).Ну и еще всех испугала речь речь председателя ФРС Джанет Йеллен, которая выступая на совещании, посвященному в т.ч. возможному повышению ставки Федеральной резервной системы, конкретно залипла -- выглядело это действительно апокалиптически (дорогой Леонид Ильич отдыхает)
По итогам очередного заседания в руководстве Федеральной резервной системы приняли решение сохранить монетарную политику без изменений. Вместе с тем, официальные прогнозы ФРС США указывают, что до конца этого года процентные ставки будут повышены дважды.
Председатель ФРС США Джанет Йеллен предупредила о потенциальных рисках, связанных с повышенными ценовыми уровнями американского фондового рынка.
Кто такая Джанет Йеллен? Давайте в очередной раз обратимся к Википедии: "Джанет Йеллен родилась в еврейской семье. Мать - Анна (девичья фамилия Блюменталь), отец - Джулиус Йеллен работал семейным доктором. Джанет закончила среднюю школу форта Гамильтон в Бруклине. Бакалавр Университета Брауна (1967, с отличием), доктор философии Йельского университета (1971). Преподавала в Гарварде (1971-1976), в Лондонской школе экономики (1978-1980) и в Школе бизнеса Хааса (Калифорнийский университет; с 1980 года). Возглавляла Совет экономических консультантов при Президенте США (1997-1999). Президент Федерального резервного банка Сан-Франциско (2004-2010). С 2009 года член Комитета по открытым рынкам ФРС США с правом голоса. С 4 октября 2010 года - заместитель председателя Совета управляющих Федеральной резервной системой США. 9 октября 2013 года Йеллен выдвинута кандидатом на пост главы ФРС президентом США Бараком Обамой". Даже из такой короткой выдержки из биографии Джанет Йеллен можно понять, что она имеет достаточно большой экономический и жизненный опыт. Но давайте более пристально посмотрим на Джанет Йеллен. Йеллен - сторонник активного стимулирования экономики. Она считает, что кризис можно предотвратить лишь жестким регулированием экономики. В бытность своей академической карьеры она много сил потратила на изучение последствий безработицы. Джанет Йеллен ставит во главу угла именно борьбу с безработицей. Возможный рост инфляции на данном этапе не вызывает у нее опасений. Судя по всему, Йеллен будет всемерно пытаться снизить безработицу. Вопрос только в том, какую именно безработицу она будет стараться уменьшить: реальную или официальную (об особенностях подсчет безработных, которые включаются в официальную статистику мы рассказывали в первой части статьи). Весьма интересен тот факт, что Джанет Йеллен умеет находить компромиссы внутри ФРС. Не в ее правилах идти напролом и сталкивать людей лбами. Также известно, что в данный момент Джанет Йеллен возглавляет подкомитет ФРС по коммуникациям и можно ожидать от нее, по крайней мере, не меньшей (по сравнению с Б. Бернанке) открытости при озвучивании планов ФРС на ближайшую перспективу. Таким образом, может показаться, что с приходом Джанет Йеллен на пост председателя ФРС США серьезных изменений в монетарной политике ожидать не стоит. Но это только кажется. Главный вопрос, который задают себе многие экономисты и аналитики всего мира — когда закончится программа Количественного смягчения (англ. Quantitative easing, QE). В данный момент на рынке видят два варианта развития событий. 1. Первый вариант. Объявить о сворачивании программы Количественного смягчения и начать избавляться от тех элементов системы, которые тянут ее вниз. Иными словами, это кардинальный способ избавиться от "опухоли" хирургическим путем и оздоровить экономику. Но возникает вопрос, а возможно ли это? Не с системной ли "опухолью" мы имеем дело? Не заражена ли изначально существующая экономическая модель? Почему в последние десятилетия с завидным постоянством надуваются и лопаются пузыри? На этот вопрос каждый должен ответить сам. Но, пожалуй, всем известно изречение: "Ведь, если звезды зажигают - значит - это кому-нибудь нужно?". А если перефразировать это изречение, то получим следующее: "Если пузыри надувают - значит - значит это кому-нибудь нужно?". 2. Второй вариант. Мягкий уход от программы Количественного смягчения и/или замены на какую-либо другую аналогичную программу стимулирования экономики. Это позволит и дальше создавать видимость роста экономики и снижения безработицы. Другими словами позволит держать экономику в состоянии "пациент скорее жив, чем мертв". Т. е. второй вариант чем-то похож на медикаментозное лечение. То есть реализация такого сценария, возможно, и не принесет исцеления, но, по крайней мере, окажет положительный кратковременный эффект. Но существует риск того, что пациент уже привык к данным "лекарствам", а потому их эффективность значительно снизилась. В этом случае помогает либо увеличение дозы лекарства, либо смена его на более эффективное. Какой сценарий будет реализовывать Джанет Йеллен? Я думаю, что ответ очевиден. Вопрос лишь в том, сможет ли она подобрать нужное "лекарство", которое еще какое-то время сможет поддерживать на плаву экономику США. Благо, что США могут позволить себе самое лучшее "лекарство", которое можно купить за деньги. И по "счастливой случайности", деньги эти печатают именно США. Но не стоит также забывать, что иногда, даже самое лучшее и правильно подобранное лекарство уже не помогает. А нам остается только надеяться на лучшее...
...выгоды QE превышают издержки (только посчитать сложно) ...опасность представляет, как раннее сворачивание QE, так и слишком позднее сворачивание (что такое "вовремя" никто не знает) ...у ФРС есть инструменты для нормализации политики (правда контролирует процесс она все меньше и меньше) ...пока Йеллен не видит рисков для финансовой стабильности, не видит пузырей на рынках акций и недвижимости (она их всегда видела только постфактум) ... не уверена в том, что настало время для сворачивания QE и хочет видеть более устойчивое восстановление, но готова рассмотреть этот вопрос на ближайших заседаниях (все та же песня, может да... может нет) ...QE приносит пользу всем американцам... (но чуть позже в выступлении)... непропорционально бОльшую долю получили ТОП10 (всем... но в разной форме и степени), Йеллен беспокоит рост расслоения ...ФРС не является заложником ситуации на рынках, но внимательно следит за этой ситуацией ) ... Сворачивание не будет идти заранее заданным курсом (это, пожалуй самое важное) Так, или иначе, Джаннет Йеллен постаралась обойти все острые углы достаточно аккуратно, по большей части, повторив последние заявления ФРС и подтвердив свою приверженность политике Бернанке, хотя и остается на стороне сторонников более мягкого подхода. Йеллен верит в то, QE внесла существенный вклад в экономический рост, улучшила перспективы. Йеллен только в очередной раз повторила: будем действовать "по ситуации" ). ФРС, видимо, будет искать возможность "развязать себе руки" и отказаться от жестко определяемого размера QE3, одновременно сделает все, чтобы убедить всех в продолжении длительного периода нулевых ставок (играя прогнозами?). P.S.: Скорее январь, чем декабрь P.P.S.: ЦБ Чехии девальвировал крону и зафиксировал минимальные уровни кроны к евро после понижения ставок ЕЦБ... кто следующий )
Год назад, когда мы еще не знали о номинации Джанет Йеллен на самую важную в мире должность и не подозревали о том, что Банком России тоже будут управлять женщины, былa интересная ситуация с российской денежно-кредитной политикой. На Банк России тогда набросились аналитики и журналисты, ругая его почем зря. Потом горячие головы остыли и запели другие песни, но урок был для всех очень важный. Особенно важным он был для Банка России. Размышляя на эту тему, я тогда упоминал апрельскую 2012 года речь Джанет Йеллен. Та речь Йеллен и реакция на нее Джона Тейлора казалась полезной в качестве иллюстрации тогдашних проблем Банка России, которые в последнее время наши руководительницы уже начали активно исправлять. Еще речь Йеллен была очень важной для понимания сегодняшних проблем ФРС, который не смог объяснить, что же такое "тэйперинг" и почему это не "тайтенинг" :). С тех пор рынки всего мира, включая те страны, где они только формируются, трясет. Ориентацию восприняли как дезориентацию, несмотря на завидную прозрачность ФРС, постоянный диалог с участниками рынка, обилие данных и аналитики итд итп. Задача у Бернанке, Йеллен и их коллег новая и сложная, и будем надеяться, что Джанет Йеллен с ней успешно справиться. Мы хотим от нее понятных подробностей, убедительности, успокоительного тона и уверенности. Примерно то же требуется от нового руководства Банка России. В области денежно-кредитной политики (и финансовой стабильности) российские задачи намного понятнее американских, идти надо по давно проторенной дорожке, поэтому ожидания должны быть большими.
Акулы Wall St в массовом порядке отказываются от должности финансового бога, самой могущественной и престижной профессии – поста руководителя Федерального Резерва. Гайтнер сошел с самого начала, а Саммерс дезертировал на финишной прямой. Бен Бернанке отказался от третьего срока еще год назад. Почему? Бойня финансовых элит, политическая-кулуарная возня или личная прихоть кандидатов? Гайтнер и Саммерс имеют различные методы управления и взгляды на финансово-экономическую политику, и они достаточно амбициозны, чтобы отказываться от самой желанной должности координатора глобальных финансовых потоков. Не думаю, что у них есть дела поважнее, чем пост главы ФРС, да и не столь стары они. Как один из вариантов, причина может заключаться в том, что работает инстинкт самосохранения. Никто не хочет быть последним председателем ФРС, которому придется из руин вытягивать нечто, что ранее называлось глобальная финансовая система. А рычагов противодействия больше не осталось - все кранты. Другими словами, капитаны, увидев брешь в корабле, пытаются тихо дезертировать, не поднимая шуму. Гайтнер и Саммерс профессионалы в своем деле и достаточно компетентны, чтобы понимать, что та архитектура финансовой иерархии, которая существует сейчас нежизнеспособна в среднесрочной перспективе. Когда денежно-кредитная политика ФРС направлена на крышевание и обеспечение преступных схем по отмыванию денег в особо крупном размере, когда приходится идти в ущерб реальной экономики, чтобы формировать устойчивое положение финансовых элит – все это не есть правильно и обречено на разрушение. Что сделало ФРС за последние 4 года для экономики? Ничего положительного и очень много отрицательного. Во время QE2 с попустительства ФРС было организовано масштабное ралли на рынке комодитиз и продовольствия, что через инфляцию издержек отняло от экономики до 1% ВВП. Во время QE3 ФЕД достаточно мощно тормозил восстановление рынка недвижимости. С одной стороны через рост цен на дома, тем самым понижая покупательскую способность у домохозяйств. С другой стороны - рост ставок по ипотечному кредитованию на 1-1.2 п.п. (30 летние кредиты подорожали до 4.6% против 3.3-3.5% год назад). Причиной этому стал рост ставок на трежерис – бенчмарк для ценообразования на долговых и кредитных рынках. Не кажется вам странным, что в момент прекращения роста гос.долга и активного выкупа ФРС, цены по трежерис рухнули, хотя по балансу спроса и предложения должны были вырасти, формируя доходности до 0.9-1.3% по 10 летним, а получили 3%. Почему? Ставки по трежерис выросли за счет действий прайм дилеров с целью обеспечения бесперебойной работы QE3. Проблема заключалась в том, что когда Казначейство США прекратило чистую эмиссию долга, то у прайм дилеров в пределах двух месяцев закончились трежерис для продажи, а выкупать их с рынка в объеме до 50 млрд в месяц было очень сложно. Не было столько продавцов. Поэтому только через сокрушительный обвал цен (рост ставок) и глобальную информационную войну против долгового рынка удалось вышибить инвесторов из трежерис на лоях по маржин коллам. Иначе выходить не хотели. Рост ставок по трежерис – результат обеспечения работы QE3 при прекращении эмиссии долга минфином. Негативным эффектом этого стало то, что ставки по всем долговым инструментам выросли – типичное синхронизированное поведение активов в новой реальности. Что сделало ФРС за последние 4 года для Wall St? Ну, почти все. Самое важно, что стоит отметить. Это глобальная преступная - мошенническая схема по отмыванию денег. Суть в следующем. ФРС выкупает активы на вторичном рынке, давая дилерам заработать на курсовой разнице между ценой покупки и продажи. Дилеры кладут деньги на счета в ФРС, получая проценты по избыточным резервам. Ну а главное другое. Дилеры конструируют финансовые пирамиды, выкупая финансовые активы под залог резервов в ФРС. Т.е. эти аферисты получая необеспеченные деньги, выкупают реальные обеспеченные активы, создавая самый чудовищный пузырь в истории человечества, где даже вакханалия с MBS кажется незатейливой возней в детском саде по сравнению с тем монетарным безумием, что они создали теперь. Чтобы это смотрелось наиболее выпукло, то приведу забавный факт. За всю историю фондового рынка в США не было еще ни разу, чтобы индекс вырос более, чем на 20% за год при отрицательной динамике годовой выручки компаний, входящих в этот индекс и при условии высокой базы предыдущего года. Были случаи, когда росли и на 30%, но после соответствующего провала в прошлые года. были случаи, когда росли по 20% в год на высокой базе, как в конце 90-х, но тогда фин.показатели компаний показывали экспоненциальный рост. Но, чтобы при падении выручки и стагнации прибыли такой рост? Ни разу! В совокупности торговля оружием, наркотиками, контрафактными медикаментами, рабами и человеческими органами не идет ни в какое сравнение по объему с новейшими достижениями денежно-кредитного произвола ФРС. Это операция не для экономики, а для банкиров, что прекрасно понимают все чиновники ФРС и все люди, кто хоть немного приближен к этому бардаку. Унылый, потерянный вид Бернанке на пресс конференциях, отказ от участия в выборах на пост главы ФРС от главных воротил Wall St –звенья одной цепи. Никто не хочет пачкать руки в этом дерьме, портя себе репутацию и всю оставшуюся жизнь. Я не думаю, что Бернанке имеет психологию и склад характера матерого преступника. Он по натуре академический червь, ученый, который большую часть своей жизни отдал науке и преподаванию. Когнитивный диссонанс, возникший в его мозгу, когда приходится обеспечивать поддержку финансовому спруту, нарушая целостность системы – все это низвергает его в уныние. История умалчивает, плачет ли Бернанке по ночам от морального истощения или закостенел уже? Под гнетом обстоятельств он превратился в тролля мирового уровня, когда приходится врать, покрывая преступные схемы под предлогом «борьбы с низкими темпами восстановления экономики и высокой безработицы». Он не настолько глуп, что не видеть рисков, которые создает текущий произвол ФРС, но не Бен Бернанке принимает решение о QE, а CEO ведущих инвест.банков. Трагедия Бернанке в том, что он осознает, что ему придется остаться в истории человеком, под руководством которого создали самую чудовищную авантюру, самую глобальную мошенническую схему из когда либо виданных человечеством, где ФРС выступал как архитектор и покровитель всего созданного бардака в фин.системе. Еще никогда ФРС своими руками не создавал самый масштабный в истории пузырь. А вот под чьи руководством система пойдет ко дну? Вероятно, эту роль отдадут милой старушке с тем расчетом, что это наименее ценный боец из тех, кто может возглавить ФРС. Возможно с циничным расчетом, что старушка в годах, а Саммерс и Гайтнер значительно моложе и они жить еще хотят! )) А отвечать придется Йеллен за тот беспредел, который создан при текущем руководстве. Саммерс, Бернанке и Гайтнер хитрые деятели и просекли, что следующий срок главы ФРС станет, судя по всему последним в нынешней архитектуре финансовой системы … и, так сказать, умыли руки. Крысы бегут с корабля! Отвечать придется. Учитывая, что весь рост финансовых рынков обеспечен залогами под куешные резервы, то в случае форс мажора попытка скорректироват балансы вызовет фатальное, сокрушительное воздействие на фин.рынки с эффектом «глобальной паники», когда бидовать рынок будет некому, а позиции резать придется. Фактически, действия ФРС - это действия диверсантов, подрывающих долгосрочную стабильность фин.системы в угоду краткосрочным прибылям Wall St, причем в прямой ущерб реальной экономике. Система в нынешнем виде не устоит. Можно было бы предположить, что кризис 2008 их чему то научит, например быть более осторожными к рискам, менее озверевшими и падкими к краткосрочной прибыли, но нет. Пошли во все тяжкие, лишь усиливая все дисбалансы и пороки, которые пятью годами ранее чуть не уничтожили современный ландшафт.
Кто сядет в кресло Бернанке: Саммерс, Кон или Йеллен? Рынку, который любит традиции и с трудом приемлет новшества, предстоит пережить одно из важнейших потрясений: смену главы американского Федрезерва. Ведь это ... From: Моше Кац Views: 0 0 ratingsTime: 03:02 More in News & Politics
Bloomberg News провел опрос (9-13 августа) среди 63 экономистов по теме вероятных кандидатов на пост главы ФРС США, который сменит в 2014 году Бена Бернанке. Ответы распределились следующим образом: 65% - Джанет Йеллен ("Бернанке в юбке"), 25% - Лоуренс Саммерс (человек Обамы). источник: Bloomberg