In the wake of the financial collapse of 2007, central banks around the world run by Keynesian zealots religiously applied the formulas they had been taught would boost aggregate demand and rescue the economy from the brink of total catastrophe. Easy money, going under the euphemistic moniker of “quantitative easing” was supposed to stimulate borrowing, spending and growth through the mechanism of historically low interest rates. Predictably, this approach failed miserably, as these kind of policy decisions largely miss the point of how the economy really works. As long as central banks continue to meddle with the money supply, investments will not be made efficiently and the economy as a whole will suffer.
As Barron's notes in this recent interview, Marc Faber view the world with a skeptical eye, and never hesitates to speak his mind when things don't look quite right. In other words, he would be the first in a crowd to tell you the emperor has no clothes, and has done so early, often, and aptly in the case of numerous investment bubbles. With even the world's bankers now concerned at 'unsustainable bubbles', it is therefore unsurprising that in the discussion below, Faber explains, among other things, the fallacy of the Fed's help "the problem is the money doesn't flow into the system evenly, how with money-printing "the majority loses, and the minority wins," and how, thanks to the further misallocation of capital, "people with assets are all doomed, because prices are grossly inflated globally for stocks and bonds." Faber says he buys gold every month, adding that "I want to have some assets that aren't in the banking system. When the asset bubble bursts, financial assets will be particularly vulnerable."
We discussed the new skirmishes this weekend in the very public debate about Carmen Reinhart’s and Kenneth Rogoff’s (RR) government debt research as they fought back against Paul Krugman's smear campaign. Krugman, of course, is one of the pundits who last month published “incomplete, exaggerated, erroneous and misleading” reports about RR’s research, as we explained at the time. We still haven’t found an RR critic who’s made a genuine effort to estimate how much debt is too much and in an effort to, we read Krugman's book (cover-to-cover) to see if there was anything more to Krugman’s positions than über-Keynesianism and boasts that his adversaries were proven wrong. Krugman's logic is full of holes. Near-term inflation and interest rate predictions have little to do with one’s beliefs about the mostly long-term risks of excessive debt. Krugman’s use of decidedly non-Keynesian episodes of debt reduction to justify his Keynesian beliefs reminds me of the many times (too many) that I’ve encountered 'circular reference' errors in Excel. His logic is no less flawed or 'circular.' But since there’s no spreadsheet involved, we’ll call it an error of induction. We think it’s time to change focus and consider the questionable thresholds, selective data use and induction error in Krugman’s work.
By now it is conventional wisdom that the Italian economy is foundering alongside all other peripheral European nations as a result of a failed artificial currency leading to an inability for external rebalancing, a flawed monetary system leading to a collapse in credit demand, and the lack of any structural reform (and sorry, but when your budget deficit is soaring alongside your debt it's anything but "austerity's fault"). However, there is hope. According to Italy's trade union CGIL, good news may be just around the corner as Italy looks set to recover its pre-crisis unemployment level... In 2076, or a brief 63 years from now. "So, you're telling me there's a chance."
As violent protests persist across Turkey, and spread from Istanbul to the capital Ankara, and Izmir, here is a visual summary of what is going on courtesy of Reuters.
The spin-doctors are hard at work talking up America’s subpar economic recovery. All eyes are on households. Thanks to falling unemployment, rising home values, and record stock prices, an emerging consensus of forecasters, market participants, and policymakers has now concluded that the American consumer is finally back. Don’t believe it. In short, the American consumer’s nightmare is far from over. Spin and frothy markets aside, the healing has only just begun.
What is the only thing better than a possible Einhorn (impersonator) sighting at a Herbalife conference call? Why Bruce Wayne from Wayne Enterprises, exhausted from recent skirmishes with Bane and the Joker, asking the CEO of Archer Ltd if he can invest in "some technology he is developing." We can only hope Batman were to show up on an earnings call of one of the companies, all of them financial of course, that truly need his attention.
The US Attorney General's New Normal Watergate fiasco gets more surreal by the day. Eric Holder, currently being investigated for lying under oath, has been in hot water ever since the break of the AP scandal. But it has been his "handling" of the spillover that has raised eyebrows. The latest update is sure to raise them even more. Because it turns out that during Thursday's "off the record" meeting which the majority of the press boycotted for the simple reason that the reporting press probably can't go off the record when the topic is the US government's precedence over the first amendment or it will lose what little credibility it has left, Holder's message was simple: "trust me, I am the government, and I will stop spying on you." The farce just goes downhill from there.
Over the past few months we have explained in detail just how 'frothy' the credit market has become. Probably the most egregious example of this exuberance is the resurgence in covenant-lite loans to record levels. It seems lenders are so desperate to get some yield that they are willing to give up any and all protections just to be 'allowed' to invest in the riskiest of risky credits. With credit having enjoyed an almost uninterrupted one-way compression since the crisis, momentum and flow has taken over any sense of risk management - but perhaps, just perhaps, Sallie-Mae's corporate restructuring this week will remind investors that high-yield credit has a high-yield for a reason. The lender's decision to create a 'good-student-lender / bad-student-lender' and saddle the $17.9bn bondholders with the unit to be wound-down, while as Bloomberg notes, the earnings, cash flow, and equity of the newly formed SLM Bank will be moved out of bondholders’ reach. Bonds have dropped 10-15% on this news - considerably more than any reach-for-yield advantage would benefit and we wonder if these kind of restructurings will slow the inexorable rise in protection-free credit.
While the U.S. student loan debt “crisis” might be the primary concern associated with the youth population here, this morning's dreadful European data confirms that 15-24 year olds around the world are struggling with a more widespread and pressing issue: high unemployment. In 2012, the youth unemployment rate was 12.4%, projected to grow to 12.6% in 2013 – nearly 3 times the rate of adult unemployment, which stood at 4.5% in 2012. Developed economies, along with the Middle East and North Africa, have some of the worst youth unemployment rates in the world: the US’s unemployment rate for 15-24 year olds in 2012 was 15.4%, according to the Current Population Survey, more than 3 percentage points above the world average. ConvergEx's Nick Colas notes there is one exception to the U.S.’s high rates, though: for all the talk about how student loan debt has crippled young adults in the U.S., we actually have one of the lower unemployment rates for young adults with a tertiary (college) education – better, even, than many countries with free or low-cost universities (though the 'type' of jobs may be questionable).
For all the attention paid to the 1.9% drop in PIMCO's $293 billion Total Return Fund in the month of May following one of the worst months for bonds in a long while, perhaps a far more important question is what happens when one mixes the world's largest actively managed, fixed income portfolio, that of the $3.4 trillion hedge fund located at 33 Liberty Street, and its DV01 of over $2.5 billion, with the 46 bps move in the 10 year in the month of May, and gets a P&L of ($115) billion, or double the said hedge fund's total capital.
At some point, the Millennial generation will have to awaken to the fact that the only way to change its fate is to grasp political power and redirect the policy and mindset of the nation. Centralization is the black hole that is destroying the nation's social and economic vigor. Decentralization, transparency, accountability, adaptability, social innovation, a community-based economy - these are the key features of a sustainable social order. The existing social and financial order is crumbling because it is unsustainable on multiple levels. The Status Quo will cling to its false promises and corrupt centers of power until the moment the whole thing implodes. The central state is not the Millennials' friend, it is their oppressor.
"Some color on the extent of the selling from Laine Litman on the futures desk: Starting 6 minutes before the cash close we saw a strong sell off in ESM3. As predicted, volumes and volatility were high. We sold off 7 handles before the additional quick crash of 4.25 points in the final few seconds. Over 110k contracts traded in the last minute. This is the largest non-quarter end volumes seen since November 2011 (117k) and the largest volumes since June 2012 (111k)."