Keynesian stimulus always has been presented as a government action that improved general or overall economic conditions, as opposed to being a political wealth-transfer scheme. In reality, the government-based stimulus is based upon bad economics or, to be more specific, one of bad economic logic. To a Keynesian, an economy is a homogeneous mass into which the government stirs new batches of currency. The more currency thrown into the mix, the better the economy operates. Austrian economists, on the other hand, recognize the relationships within the economy, including relationships of factors of production to one another, and how those factors can be directed to their highest-valued uses, according to consumer choices. The U.S. economy remains mired in the mix of low output and high unemployment not because governments are failing to spend enough money but rather because governments are blocking the free flow of both consumers’ and producers’ goods and preventing the real economic relationships to take place and trying to force artificial relationships, instead.
Just six brief days after we discussed the somewhat stunning fact that none other than Fabrice "Fabulous Fab" Tourre was set to each an economics course at the University of Chicago, it appears the prestigious school has had second thoughts. As WSJ reports, a university spokesman explained, "as preparations continue for the Spring Quarter, Fabrice Tourre will no longer be assigned as an instructor for Honors Elements of Economic Analysis," decling to comment on the specifics of the sudden change. We are sure there is an 'ethics' course that needs a TA.
Earlier today we were surprised when none other than uber central-planning skeptic, not to mention bond fund manager, Bill Gross threw in the towel and in his latest letter advocated the purchase of risk assets - and Bill Gross is the last person needing reminding that in a day and age when the 10 Year yields just barely over 2.5%, this means not bonds but stocks. The surprise, however, promptly disappeared when we realized that PIMCO is merely the latest entrant in the scramble for yield game following, with a substantial delay to all of its other "alternative" asset management peers, right into ground zero: European toxic debt.
With the world distracted by Putin and ICBM launches, The White House, according to the WSJ, is about to extend Obamacare deadlines by another year:
*U.S. MAY GRANT 1-YR EXTENSION ON HEALTH LAW REQUIREMENTS: WSJ
*WSJ CITES INDUSTRY OFFICIAL ON INSURANCE COS., HEALTH CARE LAW
Allowing insurers to keep selling policies that do not meet standards for another year. It seems, if you like your healthcare policy, you can keep it for one more year... (most importantly past the Midterms)
It would appear the BFTATH mentaility has morphed into a BTFICBMD perspective as the "market" shrugs off an 'apparently expected' ICBM launch to soar to new record highs with the best day in stocks for months (if not years). USDJPY was in charge intraday as 102 was flushed through (with JPY's biggest drop in 2 months) and dragged stocks (led by the "most-shorted") non-stop. Equity volumes were 20-30% below yesterday's. The USD was relatively unmoved on the day (modestly higher oddly on a risk-on day). Gold and oil prices slipped (but remain in the green on the week) as Silver slipped into the red. Copper rallied. Treasury yields surged 6-8bps (the biggest jump in 4 months) as 2s10s steepened 6bps. VIX was cracked 2 vols lower to 14%. The S&P closed at 1873, just 27 points shy of Goldman's 2014 year-end target.
Last summer, we detailed plans in the UK to unveil default internet filters, sold to the public under the guise of “blocking child porn” and all sorts of other unethical and illegal activities, would actually provide a backdoor to censoring the internet. Well it turns out it is even worse than that. Apparently, Patrick Rock, an official who helped draw up guidelines on Internet porn filters, has been arrested for child porn. You can’t make this stuff up.
Truth, propaganda, or outright lies? Nobody knows anymore, but if an ICBM launch, which apparently the US had been aware of yet which came at the worst possible time even though Putin could have easily delayed, can barely dent the stock surge, who cares anymore.
As the markets push once again into record territory the question of valuations becomes ever more important. While valuations are a poor timing tool in the short term for investors, in the long run valuation levels have everything to do with future returns. The current levels of profits, as a share of GDP, are at record levels. This is interesting because corporate profits should be a reflection of the underlying economic strength. However, in recent years, due to financial engineering, wage and employment suppression and increase in productivity, corporate profits have become extremely deviated. This deviation begs the question of sustainability. As we know from repeatedly from history, extrapolated projections rarely happen. Could this time be different? Sure. However, believing that historical tendencies have evolved into a new paradigm will likely have the same results as playing leapfrog with a Unicorn. There is mounting evidence, from valuations being paid in M&A deals, junk bond yields, margin debt and price extensions from long term means, "irrational exuberance" is once again returning to the financial markets.
This one should be intuitive: with Ukraine scrambling to load up on natgas ahead of the price surge once Gazprom ends its discount pricing, and unclear what if any access it will have to Russian gas in the future and at what cost, it was only a matter of time before the Ukraine stepped up the protection of its only true energy asset: its 15 nuclear power plant, which supply nearly half of the country's energy needs. Ukraine told as much to the U.N. atomic watchdog on Tuesday, although it framed it as a result of the "grave threat to the security" of the country posed by the Russian military. "Illegal actions of the Russian armed forces on Ukrainian territory and the threat of use of force amount to a grave threat to security of Ukraine with its potential consequences for its nuclear power infrastructure."
What Hagel proposes is not cuts, but instead a shift in spending away from personnel and toward new high-tech weapons which are favored by and profitable to the military-industrial complex. Welfare spending is bankrupting the country. But military spending is also welfare: it is welfare for the well-connected military-industrial complex, which enriches itself manufacturing useless boondoggles like the F-35 fighter. A proper foreign policy would mean a strong national defense, but a huge reduction in interventions and commitments overseas. Why are we stirring up trouble in Ukraine? In Syria? In Africa? Why are we defending South Korea and Japan when they are wealthy enough to defend themselves? A proper sized foreign policy would defend the United States instead of provoking the rest of the world.
UPDATE: EU is suggesting it will help Ukraine pay its $2bn Russian gas bill (to keep its spice flowing)
The question many are asking this morning is what is the iron-first of Putin thinking? With his "military exercise" over, does he believe it enough to have shown the world his potential for disruption? We suspect another reason may have been weighing on his mind. As we noted previously, Europe accounts for around a third of Gazprom's total gas sales, and around half of Russia's total budget revenue comes from oil and gas... and whatever Putin's geo-political ambitions, we suspect he did not want to jeopardize that source of revenue - no matter how much sabre-rattling and Gazprom-fear-mongering. As the following chart shows, Europe should be sighing a huge relief this morning - but remain cognizant that this, we suspect, is far from over.
Because BTFWWIII is so yesterday, we present BTFICBMD:
RUSSIA TEST FIRES INTERCONTINENTAL BALLISTIC MISSILE: INTERFAX
RUSSIA TEST FIRED MISSILE FROM RANGE IN ASTRAKHAN REGION: IFX
RUSSIA MISSILE LAUNCHED AT 10:10PM IN SOUTHERN RUSSIA: INTERFAX
INTERFAX CITES RUSSIAN DEFENSE MINISTRY ON MISSILE TEST
But, the talking heads said Ukraine was fixed and Putin had folded?
The magical thinking highlighted in two charts, as WaPo reports; in his budget request, Obama projects public debt as a percentage of gross domestic project falling to 69% by 2024, while the CBO has it rising to 79% - a difference of 10 percentage points, or roughly $2.7 trillion. As WaPo notes, the likelihood of this scenario unfolding... zero.
It appears, given comments from Foreign Minister Lukashevich, that things are about to get ugly again...
"we will have to respond...if provoked by rash and irresponsible actions by Washington... and not necessarily symmetrically."