Archive - Oct 2014

The bell has rung for Pavlov’s dogs twice before, but the meat of higher inflation has not been delivered. Now the bell is ringing for the third time. With the key driver of inflation events well beyond US shores, the inability of the Fed to generate the meat of inflation will be much more apparent on this occasion. After five and a half years of QE there is still no meat for the dogs: real rates of interest are rising rapidly and almost all financial market instruments are overvalued. If you believe that the correct price for financial market instruments is the price decreed by the Federal Reserve, you need to look at the chart above and ask yourself a simple question, ‘With inflation expectations back at 4Q 2009 levels, what evidence is there that QE works?’

• 25 BANKS SHOWN WITH CAPITAL SHORTFALL IN ECB TEST: DRAFT TEXT
• ABOUT 10 BANKS SAID TO BE IN TALKS ON CAPITAL SHORTFALL
• 105 EURO-AREA BANKS PASS THE ECB'S ASSESSMENT: DRAFT DOCUMENT
• ECB PRELIMINARY ASSESSMENT RESULTS SEEN BY BLOOMBERG NEWS

Many have recently drifted toward believing the Fed will be ‘lower for longer’.   My view is that the Fed will be ‘sooner, but slower’.  In other words, I expect the Fed to hike in March or sooner, but then run into problems that will slow the pace (and make it difficult to get to 1% by the end of 2015).  Moreover, today’s equity market ‘melt-up’ should be a warning sign to the Fed of the moral hazard, one-way, bubble-like conditions it has instigated.

It has been over six months since the Chinese housing bubble has popped. What's worse, as overnight housing numbers out of China confirmed, the government has so far failed to contain the fallout, and according to the National Bureau of Statistics, which is anything but, after a fifth straight monthly decline, Chinese home prices have now wiped out all price gains in the past year. This was immediately spun as bullish by media outlets and sellside experts as "raising expectations the government will have to implement more economic support measures to cushion the blow." I.e., buy stocks because central banks will push risk prices artificially higher yet again. In other words, bad is still good and failure continues to be success.

• Doctor with Ebola in New York hospital after return from Guinea (Reuters)
• Ebola Puts Spotlight on Bellevue, Key NYC Trauma Center (WSJ)
• Uber Driver Transported Ebola-Positive Doctor in New York (BBG)
• GOP Gains in Key Senate Races as Gender Gap Narrows (WSJ)
• ECB Tries for Third Time Lucky in European Stress Tests (BBG)
• Security tight in Canada as police probe Parliament gunman's ties (Reuters)
• Why Madrid's poor fear Goldman Sachs and Blackstone (Reuters)
• Fed’s $4 Trillion Holdings Keep Boosting Growth Beyond End of QE (BBG)

And just like that, the Ebola panic is back front and center, because after one week of the west African pandemic gradually disappearing from front page coverage and dropping out of sight and out of mind, suddenly Ebola has struck at global ground zero. While the consequences are unpredictable at this point, and a "follow through" infection will only set the fear level back to orange, we applaud whichever central bank has been buying futures (and the USDJPY) because they clearly are betting that despite the first ever case of Ebola in New York, that this will not result in a surge in Ebola scare stories, which as we showed a few days ago, may well have been the primary catalyst for the market freakout in the past month.

*PATIENT IN NYC TESTS POSITIVE FOR EBOLA, NEW YORK TIMES SAYS, EBOLA PATIENT GIRLFRIEND QUARANTINED: CNN
*TREASURIES ADVANCE, S&P 500, NASDAQ 100 FUTURES EXTEND DECLINES ON EBOLA REPORT

Cuomo: "There is no reason for New Yorkers to be alarmed..." *HAVE IDENTIFIED 4 PEOPLE IN CONTACT WITH EBOLA PATIENT, PATIENT WENT ON 3-MILE JOG, BOWLING, SUBWAY

Dr Craig Spencer, 33, who returned to the U.S. ten days ago from Guinea, was admitted to Bellevue Hospital in midtown Manhattan on Thursday and is being cared for in isolation. The doctor flew to Africa on September 18 to treat patients in Guinea with non-profit organization, Medecins San Frontieres (MSF).  On October 16, he checked in at a hotel in Brussels, Belgium, presumably on his return journey from Guinea to the U.S. 

One of the most dangerous philosophical contentions even amongst liberty movement activists is the conundrum of government force and prevention during times of imminent pandemic. All of us at one time or another have had this debate. If a legitimate viral threat existed and threatened to infect and kill millions of Americans, is it then acceptable for the government to step in, remove civil liberties, enforce quarantines, and stop people from spreading the disease?

The U.S. economy continues to lose momentum despite the Federal Reserve’s use of conventional techniques and numerous experimental measures to spur growth. As Kindleberger clearly stated, the process of excess liquidity fueling higher prices in the face of faltering fundamentals can run for a long time, a phase Kindleberger called “overtrading”. But eventually, this gives way to “discredit”, when the discerning few see the discrepancy between prices and fundamentals. Eventually, discredit yields to “revulsion”, when the crowd understands the imbalance, and markets correct.

Gold has been in a bear market for three years. Technical analysts are asking themselves whether they should call an end to this slump on the basis of the "triple-bottom" recently made at $1180/oz, or if they should be wary of a coming downside break beneath that level. The purpose of this article is to look at the drivers of the gold price and explain why today's market value is badly reflective of gold's true worth.

With today's exuberance around earnings (notably forgetting the reality of various bellwether fails), we thought it appropriate to get some context on just what the "market stalwarts'" results look like in context. A third of the companies in the Dow have posted shrinking or flat revenue over the past 12 months, as WSJ notes, "steady has become stagnant as companies once considered among the market’s most reliable post poor growth, quarter after woeful quarter."

As Brookings notes, "overall the economic devastation would be difficult to exaggerate," with regard the shift from print to online journalism - as the following chart sums up in all its devastating reality... it's a new world.

Trick or Obolacare...

Albert Edwards is angry, and understandably so: almost exactly two weeks after warning readers to "sell everything and run for your lives" and the market was on the verge of its first correction in years, several powerful verbal interventions by central banks from the Fed, to the BOJ to the ECB have staged yet another massive rebound which has nearly wiped out all the October losses. Central-planning aside (and ask how much the USSR would have wished for central planning to indeed have been "aside") we share his frustrations, almost to the point where we would reiterate word for word Edwards' furious outburst, as follows: "Simply put, the central banks for all their huffing and puffing cannot eliminate the business cycle. And they should have realised after the 2008 Great Recession that the longer they suppress volatility, both economic and market, the greater the subsequent crash. Will these morons ever learn?"

Now you can substantiate to today’s generation why that '60s and '70s era’s music was objectively "better," as JPMorgan's CIO Michael Cembalest has previously noted, and furthermore, researchers also found that popular music has gotten a lot louder (as SAT scores have plunged.. hhmm?) However, as Consequence of Sound notes, a software application writer by the name of Virgil Griffith has charted musical tastes based on the average SAT scores of various college institutions... and the results are.. interesting. Bob Dylan, The Shins, Radiohead, and Counting Crows are the favorite bands of smart people. Meanwhile, Lil Wayne, Beyoncé, The Used, and gospel music comes in at the lower end of the spectrum — or, as Griffith puts it, is music for dumb people.