"Part of my advantage, is that my strength is economic forecasting, but that only works in free markets, when markets are smarter than people. That’s how I started. I watched the stock market, how equities reacted to change in levels of economic activity and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised and I’m seriously questioning whether I have any competitive advantage left. Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it's a possibility, but I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence. It's not predicting anything the way it used to and that really makes me reconsider my ability to generate superior returns. If the most important price in the most important economy in the world is being rigged, and everything else is priced off it, what am I supposed to read into other price movements?" - Stanley Druckenmiller
Several days ago, in the damage control aftermath of Snowden's NSA espionage conspiracy fact confirmation, Barack Obama took to the TV pulpit where he appealed to the nation, as he always does in times of strife, explaining that one can't have 100% security and 100% privacy. He said some other things, all of which as usual wrapped in rhetorical brilliance, if holding little of pragmatic and realistic value. So who better the debate the president's attempts at damage control than the vice president himself. Here, for your viewing pleasure, is Joe Biden, circa 2013 debating Barack Obama, circa 2013.
How risky is gold relative to other assets?
Just a few days ago we warned of the surging incentives among auto makers - and the diminishing benefits of that margin compression. It seems GM, not to be outdone by its peers, has stepped up with a hefty $5,000 discount for the Chevy Volt with demand for electric vehicles (EV) low, and falling lower, and manufacturers desperate to try anything to try and increase sales. Normally, after a couple of years of underperforming sales a manufacturer would pull its car from the market, however EV manufacturers are under pressure to keep struggling along, partly due to regulations in California (the largest car market in the US) that require all major manufacturers to offer a minimum number of Zero-Emission Vehicles. Unintended consequences once again appearing amid government regulation and cheap credit.
With unprecedented government largesse in all major financial centers around the globe, the throughput to job growth has been abysmal. Also there have been consistently poor results in key emerging economies, as we highlight in this issue of Abraham Gulkowitz's The PunchLine chart extravaganza. Mixed signals from Asia, in particular, have caught world markets off guard. New Chinese trade, inflation and industrial production datasets all undershot general expectations. Disappointing export and import figures were a particular concern. Another major concern is the likely timing of a gradual change in the Fed’s easing posture. It is inevitable. What is worrisome is that there may have been a significant reliance – a dependency - on easy money that has built up in world financial markets. Any reversal in this historic experiment in government policy leads us into the unknown.
Equities closed red for the third week of the last four with today's selloff reducing about half of yesterday's gains. The 5.25% high-to-low drop (in the S&P 500) was bid on low volume yesterday but heavier volume today was to the downside. While stocks were sold, Treasuries were bid and had their best week in over two months (as some level fo safe-haven Syria bid was evident - as well as de-Tapering chatter). What was interesting is that the USD - typically bid when war tensions rise - is weaker - its worst 3-week run since October 2010. JPY strength (+3.25%) was the main driver of USD weakness. Precious metals were bid instead as Oil and silver coincided up around 2% on the week. Financials were the worst sector on the week as, thanks to yesterday's ridiculousness, homebuilders went from zero to hero and ended the week +1%. VIX rose 0.5 vols on the week with its highest close of the year.
"First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you."
Has Abenomics failed? Impossible, Abe's fans will say: he has barely had a chance to explore his policies. That maybe true, but one major problem with Japanese society is that it is very impatient when it comes to its politicians. In fact, the median tenure in office of each of its last 10 prime ministers is precisely 419 days, or just over 1 year. And Abe is already six months into his term (his second term, of course: let's not forget he quit his first stint as PM after exactly 365 days due to diarrhea). What is worse is that the key variable that has kept his approval rating high has been the stock market: worse, because the stock market is now in freefall, and with few favorable things Abe can point to in the economy (recall that his entire policy is based on a stock-market driven wealth effect - no Nikkei ramp, no wealth effect, no inflation), he suddenly finds himself in a support vacuum.
There is no way the pensions and benefits promised in an era of financialized abundance can be paid once the wheels of financialization fall off. During the past 30 years of financialized abundance, the benefits and pensions promised to public employees were increased substantially. Public unions are a powerful political force in many states, and in eras of rising tax revenues, it's an easy political decision to increase public employee benefits and pension payouts. The rising stock and bond markets generated huge profits for the public-employee pension funds, enabling them to grow without taxpayer contributions. Alas, the 8+% annual growth rate of the boom era is now structurally unrealistic. The New Normal is bond yields of 2% or 3% at best, and equities markets that are increasingly at risk of significant sell-offs. The endgame of promises made in an era of illusory, financialized abundance will be hurried along by a collapse in the equities and bond markets.
"While we are not likely to see a repeat of that type of [30Y bond] bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds."
"We are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors."
"We believe caution is warranted not just for fixed income investors, but for investors in all risk assets; avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors"
Somewhere deep down inside the European Union's leaders must know how foolish they are with their constant proclamations that the worst of the crisis is over and that growth will return any moment now. For now, the realists in the market have to be content with hard data, and as AP reports, Spain's central bank reports the troubled nation's debt jumped to a record 88.2% of GDP in Q1 2013. The year-over-year rise is also the fastest on record - so no green shoot there as the bank notes it expects the debt burden to rise to 90.5% of GDP by the end of 2013 (but may revise that forecast - up). The raw numbers are awesome. Spain's debt was EUR 922.8 billion at the end of March - up 19.1% from a year earlier and with unemployment at 27.2% and a fourth year of recession, the more-than-doubling of debt-to-GDP in the last five years suggests the 'OMT call' may be getting closer. The stagflationary slump in Europe (inflation rising faster than expected as growth lags) continues with nearly 20 million people out of work across the region.
As goes USDJPY, so go US equities (and bonds)... as stocks retrace 'The Hilsenramp'
A 25-year-old research-and-development tax credit that was extended by Congress - following its expiration at the end of 2011 - lifted profits for many firms in the S&P 500 by over 10%. While top-line revenue growth was a damp squib, earnings grew a more robust 6.7% thanks, as the WSJ notes, in large part to this tax-credit's 'accounting' gains. This stock-market-saving tax-gimmick, however, is only for "big corporate America," since, "small firms aren't profitable enough to get the credit." Looking ahead, however, the unusual benefit from extension of the tax credit won't help corporate profits for the rest of this year as it is set to expire at the end of this year (having cost the taxpayer over $7 billion).
And so the next casualty of the inevitable municipal collapse appears, which is, as expected, that one-time symbol of all that was right with a (once upon a time) manufacturing America, having since been replaced with the anti-symbol of all that is broken: Detroit. DETROIT BEGINS MORATORIUM ON ALL DEBT SERVICE PAYMENTS FOR UNSECURED FUNDED DEBT; DETROIT TO DEFAULT ON CERTIFICATES OF PARTICIPATION DUE TODAY. And, true to from in the New Normal America, where the "fairness doctrine" rules supreme under Big Brother's watchful eye, the premise of the upcoming glorious recovery is a well-known one: "the shared-sacrifice." To wit: "The City currently faces approximately $17 billion in total liabilities. Detroit is insolvent and cannot meet its financial obligations without a significant restructuring. Mr. Orr's plan provides for shared sacrifice among all creditor groups – from Wall Street and Main Street consistent with their legal rights – in order to return Detroit to a sustainable financial foundation and to permit much-needed reinvestment in the City." The punchline: "Detroit's road to recovery begins today"... By defaulting.