Archive - May 7, 2013

Presented with little comment - aside to note, it's never different this time...

If the American people truly understood how the Federal Reserve system works and what it has done to us, they would be screaming for it to be abolished immediately.  It is a system that was designed by international bankers for the benefit of international bankers, and it is systematically impoverishing the American people. The Federal Reserve system is the primary reason why our currency has declined in value by well over 95 percent and our national debt has gotten more than 5000 times larger over the past 100 years. The Fed creates our "booms" and our "busts", and they have done an absolutely miserable job of managing our economy. So why is the Federal Reserve doing it?  Sadly, this is the way it works all over the globe today.  In fact, all 187 nations that belong to the IMF have a central bank.  But the truth is that there are much better alternatives.

The lessons of Jeremy Grantham's recent interview with Charlie Rose seem to be becoming increasingly prescient as the stock market surges to new highs amid a crumbling macro (and micro) economy. "Bernanke is whipping the economic donkey that can only grow at 1-2% as if it was a race horse growing above 3%," and unfortunately he will keep doing it "until the donkey is dead." As Grantham says, it is a "very dangerous situation to have the most powerful man in the world," doing this as simply put, the Fed, "does not have the tools to generate employment." But while Grantham's clarity on Bernanke's actions are unquestionable in their endgame, his views (below) on Keynes, debt, and wealth transfer are even more concerning. "We had this amazing experiment... but we have been conned into believing by the financial world that debt is everything."

Over the weekend Israel carried out two air strikes against Syrian positions within 48 hours. Iran is a strong supporter of Assad’s regime in Syria, and is deeply involved in the efforts to repel the rebel forces. Israel has long voiced its desires to attack Iran in order to force them to end their nuclear program before they achieve the capability to create nuclear weapons. This attack against Syria could be viewed as an indirect attack on Iran. "Israel is taking a calculated risk that Assad, Iran and Hezbollah are right now fighting a war against the Syrian rebels and probably don’t want to open up a second front against a far more formidable enemy."

In yet another example of the massive gap between the American people's perception of what is going on around them (whether by propaganda channels or simply cognitive bias) and the actual reality, Reuters reports that while gun-related homicides are down 39% from the 1993 peak, only 12% of people believe that gun crimes have fallen. Non-fatal firearm crimes declined by 69% to 467,300 in the same period but 56% of Americans believe that gun crime is higher now than it was 20 years ago, the Pew Research Center said its poll showed. The dichotomy between record food stamp usage (and non-employment) and multi-year highs in consumer sentiment comes to mind - we wonder which is more 'real'.

Of course, it doesn't matter (for now) but today's JOLTS data internals and Consumer Credit's miss just piled on to the misery and pushed Bloomberg's US Macro Surprise Index to its lowest in seven months. What is worse is the rate of collapse - the last five weeks have dropped faster than at any time since May 2011. The current level of US macro data suggests the S&P should be over 200 points lower - but as the charts below show relative volatility levels are more complacent now than in the pre-crisis vinegar strokes in 2008.

What REALLY Happened?

All Empires Crash Soon After They Reach Their Peak

The policy approach that no one dares to question - "In the long-term, we need to fix our public finances. We’re on an unsustainable path that needs to be corrected to protect younger and future generations. But in the short-term, we need to focus on growth. The economy stinks and people are suffering. Any attempt to lower debt in these conditions would be folly. On the contrary, the government needs to provide more stimulus to promote growth" has no support to its key premise in business cycle history, the idea that the economy will return to full employment and stick there, allowing ample time for debt reduction. Once stimulus is removed, expansions often struggle to continue for much longer. And if the stimulus is replaced with restraint, it seems logical that the expansion’s expected life shortens further. In other words, there is no Magic Pendulum. What’s the typical life of an unassisted expansion? Based on the data presented here, I’ll call it two years.

We recently discussed the 'dead-weight' problem of youth unemployment in developed economies. The Economist estimates that the world's population of NEETs (not in employment, education, or training) is a stunning 290 million - or around one-quarter of the world's youth. Sadly, many of the 'employed' young have only informal and intermittent jobs. In rich countries more than a third, on average, are on temporary contracts which make it hard to gain skills. Young people have long had a raw deal in the labour market. Why is this so important? A number of studies have found that people who begin their careers without work are likely to have lower wages and greater odds of future joblessness than those who don’t. A wage penalty of up to 20%, lasting for around 20 years, is common. The scarring seems to worsen fast with the length of joblessness and is handed down to the next generation, too - leading to a vicious cycle that weighs on growth dramatically. With a stunning 71% now expecting to work in their 'retirement' in the US, it would seem the opportunity for the jobs and wealth transfer to the younger generation is being blocked by a generation hamstrung by an increasingly repressive Federal Reserve.

Gold has been hovering in the middle of a trading range for the past few trading sessions, while the most recent FOMC statement has been price supportive of precious metals and gold in particular.  While this is true, many economists have lowered their core 2013 inflation forecasts from 2% - 2.1% to 1.5% - 1.75% due mainly to the less aggressive indicators for the inflation of consumer basics. 

The financial and other markets do not seem to reflect the reality of subdued growth is how Hoisington Investment's Lacy Hunt describes the current environment. Stock prices are high, or at least back to levels reached more than a decade ago, and bond yields contain a significant inflationary expectations premium. Stock and commodity prices have risen in concert with the announcement of QE1, QE2 and QE3. Theoretically, as well as from a long-term historical perspective, a mechanical link between an expansion of the Fed's balance sheet and these markets is lacking. It is possible to conclude, therefore, that psychology typical of irrational market behavior is at play. As Lance Roberts notes, Hunt suggests that when expectations shift from inflation to deflation, irrational behavior might adjust risk asset prices significantly. Such signs that a shift is beginning can be viewed in the commodity markets. "Debt is future consumption denied," and regardless of the current debate - Reinhart and Rogoff were right. Simply put, "the problems have not been solved, they have merely been contained."

It was exactly two months since Icahn last issued a 13D in Herbalife, at which time he reported that he owned 15.5% of the company, following yet another stock buying spree. Moments ago, the billionaire, set on a mission to crucify Bill Ackman, updated his latest holdings in HLF stock with another 13D filing, which shows that on March 8 and May 3, his various funds added another 934 thousand shares, bringing his total ownership of Herbalife to 16.48%, or 16,966,485 shares and rising. Obviously the recent earnings report, which hiked the company's year end outlook, has hardly dented Icahn's enthusiasm for inciting either a short covering spree, or for eventually going ahead and tendering (or going hostile, using zero cost debt of course courtesy of a Jefferies highly confident letter) for whatever shares he doesn't already own.

While there have been no new military attacks on Syria since Sunday morning, something more peculiar happened in the past few hours, when according to Akamai and various other Internet traffic trackers, Syria has literally gone "dark", or, as Umbrella Security Labs describes it, as if "Syria has largely disappeared from the Internet."

The company provided a liquidity update, which was as follows: "The Company estimates cash and cash equivalents to be approximately $821 million as of May 4, 2013. Total debt is expected to be approximately $3.818 billion as of May 4, 2013, including amounts outstanding on the revolving credit facility of $850 million, long-term debt of $2.868 billion, and capital leases and notes payable of $100 million." What does this means for the company's all important cash burn rate? Since the reported cash and equivalents as of December 31, 2012 was $930 million, when one adds the full revolver draw of $850 million, one gets $1,780 million. So in order to get a pro forma cash number of $821 million as of May 4, it means the company burned $959 million between January 1 and May 3, 2013. This is roughly in line with what we expected when we presented the pro forma JCP cap table.