Jeff Gundlach "Society Looked Into The Debt Abyss And Decided Enough Is Enough With The Debt-Based Consumer Economy"Submitted by Tyler Durden on 09/22/2010 - 17:19
Jeff Gundlach who has been spot on with timing his calls for Treasury inflection points, did a quick Q&A with Morningstar summarizing his outlook on the economy. In a nutshell while the DoubleLine manager is still skeptical that inflation may strike, he is convinced deflation is pervasive. To wit: "markets and the economy to date have offered scant evidence to support
the inflation case. Stocks are down over the past 10 years. Real estate
is down hard over the last five years. Commodities are down sharply over
the last two years. Instead of spiking to double digits, bond yields
are hugging the ground. M3, which is now calculated only by private
economists, is down nicely over the past year. And of course money
velocity is moribund: Society has looked into the debt abyss and decided
enough is enough with the debt-based consumer economy. So, deflationary
forces still prevail. What could shift the balance of forces in favor
of inflation? A well-meaning movement to cut the deficit has at long
last arrived, maybe. But cutting the deficit that is supporting the
consumer economy will directly depress gross domestic product. If that
causes not just a look but a step or two into the deflationary abyss,
then maybe the inflation case will move to center stage." Sure, let's not forget the collapse in the shadow economy. But let's also not forget that the economy is in a vacuum, and were the Fed not in the picture, we would totally agree. But because the most irrational human being in the world is in charge of said world via his control of the US reserve currency (and irrational because he promotes exclusively policies that benefit the vast minority over the majority), we will have to disagree. And so would the price of gold.
Here are the facts: Beginning on May 5, there have been 20 consecutive outflows from domestic mutual equity funds. The average weekly outflow has been ($3.5) billion. Total outflows in this period are $70 billion. Total outflows YTD are $68 billion. The S&P on May 5, the day the series of outflows began, was 116.8. Today it closed at 113.5, a 2.8% decline despite almost $100 billion of runrated outflows. Furthermore, as we previously disclosed, YTD ETF flows through August into pure domestic equity-related strategies have been a negative $16.8 billion. In other words, the stock market is now virtually unchanged in 2010, even as almost $80 billion in equity-capital has been withdrawn.
Here is our question: how is this possible?
Guest Post: Liability-Driven Investing & Equity Duration: Implications and Considerations for InvestorsSubmitted by Tyler Durden on 09/22/2010 - 16:05
Some contrarian views on asset allocation from Yves Lamoureux: "We have already suggested looking at grains and soft commodities on top of long treasuries to be adequately immunized. I did by the way recently warn that it was too crowded a place. With the recent correction in Treasuries, it does give us a further entry point and, yes I am still in the bull camp. I have also been a strong hard asset follower for quite some time. I am now worried that this trade has become too crowded. Let me explain. Let’s take, for example, an inflatable life raft. If maximum capacity is 12 people and 36 poor souls looking for escape and survival climb aboard, the life raft will sink and will defeat its purpose. This is perhaps the tragedy in the making now in gold and corporate bonds. High uncertainty surrounding markets supports behaviour pricing big risk premiums in anticipation of events."
And now the idiot politicians are finally really involved: Reuters reports that the House will vote this coming Friday to pressure China into revaluing its currency (uh... what?). While it is unclear just what passage of this law will do (send letters full of harsh language signed "Love Schumer", or pretend Americans will no longer buy iPads and Kindles, or better yet, offer to pay a refund to the $840 billion in US bonds held by the Chinese), this will merely accelerate the collapse of world trade into all out protectionism. As we presented a week ago, Goldman's Alec Phillips was right. His conclusion offers some hope that traditional trade relations won't collapse for at least a few more months: "We think that the risk that such legislation is enacted this year is still fairly low. There is little time left on the legislative calendar, and not yet a clear legislative strategy. That said, we also don’t expect this issue to disappear after the election, given that the current political reaction is driven by the weak economy and labor market as much as it is by the political cycle." Yet with the Democrats calling this vote, it is inevitable that it will pass. What happens next is really anyone's guess.
Readers are well aware, that when it comes to big picture economic topics, one of our favorite themes is the gradual disintegration of Shadow Banking (discussed previously in detail here and here). The main reason for this is that the shadow banking system, while materially larger than traditional bank liabilities ($17 vs $13 trillion), is collapsing at a whopping $4 trillion a year annualized rate. What this implies for credit money, and for the Fed's limited reaction arsenal is hopefully all too clear. Yet as we have a habit of jumping into slightly advanced topics, here is an informative introductory post written by Dave Friedman of Wall St. Cheat Sheet (the first of three) covering some of the fundamentals of this arguably most critical for the great deflation/hyperinflation debate topic.
Recent speculation that PIMCO enjoys trading by piggybacking on what the Fed will do in the future has hopefully not escaped our readers. As we highlighted in Pimco Offloads $40 Billion In Treasurys, As Frontrunning Fed Creates Billions Of Profits; Gross Does Not Expect QE 2 On Sept. 21; Pimco's "Fed Frontrunning" Tell Exposed, Mr. Gross has a knack of buying up on margin either MBS (ahead of QE1) or USTs (ahead of QE Lite), precisely before the points when there is a big marginal push in prevailing prices higher. The fact that he did not do so in the last month confirmed to us at least that the Fed was not going to engage in QE2 on September 21 (which turned out to be the case). Yet it is one thing to speculate based on indirect evidence, and something totally different to hear Mr. Gross on primetime TV essentially validating that he just may have an inside line to the Federal Reserve Board. In all the commotion over yesterday's FOMC announcement, some may have missed the following line uttered by the Newportbeachian: "What is important going into November is the staff forecast for economic growth for the next 12-18 months. Our understanding is that the Fed is about to downgrade their forecast from 3% down to 2%." At which point the CNBC anchors conveniently confirm that Mr. Gross just disclosed something which is completely non-public: "We don't have that forecast yet, right Steve?.. We won't get that for 3 weeks Erin that's when it comes out with the minutes of this meeting." Well, we won't, but Mr. Gross, who manages $1.2 trillion in debt, almost as much as the entire Federal Reserve, sure seems to already have access to it.
With the euro surging, it was only a matter of time before the rickety house of European cards was put on full display once again. Sure enough, not 24 hours after the EURUSD hit a "German export industry suicidal" 1.34, here comes Germany's FinMin Schaeuble, who has said that if the IMF/EU hope to extend the duration of the European Bail Out Facility beyond 2013, they have another thing coming. As a reminder, Reuters reported a few days ago that "Greece's international lenders assured investors this week that they would not abandon Athens at the end of a 3-year bailout plan if it fulfilled tough reforms but failed to regain market trust." Additionally, Greek newspaper Ta Nea reported over the weekend that EU officials are considering an extension of the aid package for Greece beyond the agreed three years, due to fears that the country’s economy will not have sufficiently recovered by 2013. The reason - in 2013 Greek public debt is expected to hit its peak of 150% of GDP, a level far higher than where it is now. Regardless, it seems that Germany is once again sowing the seeds for the next crisis, as the ECB is unable to go "full retard" with QE.X right now as that would destroy the credibility of recent lies that Europe was doing oh so well (and as we are expecting a tide of European GDP revisions lower, Italy just announced a few hours back that its GDP would not meet a previous target of 1.5% as previously disclosed). In other words, the next step in the devaluation race will be out of Europe, possibly accompanied by the provisional semi-ejection of the PIIGS from the Eurozone just to make the point that not only Bernanke is a middle-class destroyer.
The topic of hyperinflation vs deflation has gotten much prominent attention in the fringe media in recent weeks (and judging by the surge in gold, this attention is shifting to the broader population). Below we provide another perspective on what the phenomenon of "hyperinflation" signifies. The conclusion is not all that surprising to the Zero Hedge community: "As long as our politicians and the federal reserve continue on their quest to debase our currency, the threat of a hyper-depression remains. I personally do not believe this will happen, as there would eventually be enough opposition to quantitative easing to cease it, due to fear that it may result in destroying the savings or our baby boomer population and the financially prudent (the people who are actually important towards having a healthy and sustainable economy). However, we may very well be in a situation where Fed officials don’t realize what they’re doing until it’s too late."
"About 11 p.m. customers start to come in and shop, fill their grocery basket with basic items – baby formula, milk, bread, eggs – and continue to shop and mill about the store until midnight when government electronic benefits cards get activated, and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher." Wal-Mart CEO
Today's POMO has come and gone, the Fed has monetized $2 billion of 3 Year bonds, the money has been funded to the PDs who have already executed their daily purchases of SPY, Amazon and Apple. The ratio of Submitted to Accepted bids was a whopping 10x. Most desired CUSIP was 912828NY2. The market can now resume its decline. Move along.
The erosion of the profitability of the U.S. banking industry over the past two years under the glorious Summers-Geithner-Bernanke rescue scheme is the proverbial fly in the ointment for both major political parties. Democrats and republicans alike are going to be fed into the meat grinder over the next several years as the banking sector deals with literally hundreds of billions of dollars in direct and indirect expenses from the deflation of the mortgage bubble. For the economy, this slow process of muddle along championed by Summers and Geithner will ensure that Barack Obama becomes the Herbert Hoover of the Democratic Party. The economic carnage that will causes these losses, as we described in a recent post in Reuters, "Double Dip or Global Deflation?," is going to represent the worst economic contraction since WWI. Forget WWII. Think "shrinkage" to use the Gilded Age description for economic deflation. - Chris Whalen
When a central bank says it is effectively LBOing Keynesianism, you know it is over. Which is precisely what Guido Mantega, Brazil's finance minister has promised to do. The Latin American country which has been caught in the crossfire of developed world central bank wars, in which it is every last man for himself and he who defects first wins, has just stated it is about to defect (and just in case it is unclear, Mantega clarified that "Brazil's would act on the currency, not just a promise"). And to confirm he means business, Mantega also added that the Brazil Central Bank has no limit to buy dollars. But here's the twist - as reported by Bloomberg, Mantega, speaking to reporters in Brasilia, said the Treasury can sell more debt to increase liquidity to buy dollars. You heard that right: debt-financed currency intervention. At least the trade surplus countries use capital generated from excess exports. Brazil is threatening to do something never before seen, which is to lever up in its FX intervention. Surely, this has to be the last boundary of Keynesian insanity.
Today's POMO Begins: The Fed, Via The PDs, Prepares To Inject Between $3 And $5 Billion Into High Beta StocksSubmitted by Tyler Durden on 09/22/2010 - 10:17
All those who were observing the pounding in futures overnight, and are stunned once again by how stocks can be higher with horrendous data out of the FHFA on the home price index which plunged to -0.5% on expectations of -0.2% and a prior print of 0.3%, need look no further than the FRBNY, where Brian Sack is warming up the Bloomberg Terminals. Up on deck: anywhere between $3 and $5 billion in repurchases of bonds maturing between 3/15/2013 – 8/31/2014, with the money immediately going to the Primary Dealers, who bid up Amazon, Apple, etc, etc, perpetuating the myth that the American economy is not dead. Expect a run up in stocks into the 11 AM close of today's POMO.
I’d like to reiterate that the point of these primers is to explain the big-picture factors that have shaped my opinion on the direction of the economy in general, and housing in particular. So far we have seen that deflation and not inflation will be the dominant force over the next several years as we have reached a point of peak credit and peak consumption in the Western world. Beyond that is anyone’s guess, and the inflationists and hyperinflationists may yet be proven right. But it won’t be in the next few years, at least not in Canada. We’ve seen that real estate in Canada absolutely is in bubble territory when the data is considered rationally and compared to widely accepted measures of fundamental value. We’ve seen that the two big drivers of this bubble growth have been mass psychology (how many times have you heard, “real estate only goes up,” despite all the contrary evidence just south of our border) and also by the erroneous and self-defeating policies of CMHC. We’re once again looking at one of the macro factors that will exert significant downward pressure on real estate prices over the next several years: demographics.