Archive - Jun 29, 2014

Indeed, for Gold to even realign based on the Fed’s actions, it would need to be north of $1,900. That’s a full 35% higher than where it trades today.

For all the debate about a college education, its opportunity cost, the trade off of only having a high-school diploma, the impact of a record amount of debt on an entire generation's spending habits, and, of course, the alleged lack of inflation everywhere expect in those critical things that 99% of Americans must spend on daily, perhaps the simplest chart is the following, courtesy of the WSJ: it shows the average annual tuition - call it the "upfront investment", whether funded by debt or equity or both - for both a Bachelor's and an Associate's degrees from 1970 until 2013, as well as the average wages of those with each type of degree, once again expressed in real dollars.

"... it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally....  Never before have central banks tried to push so hard... Few are ready to curb financial booms that make everyone feel illusively richer.  Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms.... The temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere in the end."

Hot on the heels of last week's dismal Japanese data, tonight's Industrial Production data missed rather dramatically as once again the hockey-stick'ers of hope rebound from last month's post-tax-hike plunge did not appear. USDJPY is still fading (4th day in a row), as Goldman concludes rather ominously (having folded like a lawn-chair on their J-Curve exuberance), the post-tax-hike correction is larger than the government and the market anticipated, and in view of our outlook for a slump in real wages and a resultant delayed recovery in domestic demand, we look to external demand to drive economic growth in FY2014. However, we highlight risk factors in the form of protracted weakness in China and other Asian economies and a decline in corporate Japan’s structural export capacity. Sadly for the hopers, hard data continues to miss both the production survey forecast and consensus.

Yesterday we hinted at the one 'uncertainty' that was anything but at record-lows; and it seems Goldman Sachs (who recently opined on what's at stake in the Midterms) agrees that after a period of relative calm, the US political environment looks likely to become more uncertain again. Recent developments have raised the prospect of renewed political tensions this fall. While they suggest the chance of another government shutdown is not high, the political environment has changed enough that the deadlines are likely to create real uncertainty, and an agreement may be reached only at the last minute. Crucially, if Republicans succeed in capturing the majority in the Senate following the November midterm elections, the routine around fiscal deadlines that markets have become accustomed to over the last few years may become more unpredictable (and may spill over into another debt limit debacle).

"The Japan Trade is in trouble," warns BofA's Macneil Curry (and rightly so after this week's utter collapse in Japanese data and Abe's soaring disapproval rating). Over the course of the past week both USDJPY and the Nikkei have broken key technical levels which point to further substantial downside in the weeks ahead.

"Tipping Point?"

Let Us Count the Ways ...

It’s become rather obvious that current stimulus plans are not working. Rather than scrap the madness and start over, our world political and economic leaders insist on a rather bizarre analysis that what they are doing is actually correct. But the reason for its ineffectiveness is that they haven’t done enough of it. In other words, yes the central banks and governments of the world have certainly dug themselves into a pretty deep hole. Yet, instead of trying to climb out or shout for help, they ask for more shovels – dig deeper! Many people have commented that all the world really needs is a little more confidence. Once people and companies become more comfortable they’ll start to spend again. This view is 100% correct – but what’s missing from this analysis is the reason confidence is declining. The reason for the decline is due to the very policy actions of our governments and central banks to help restore confidence. Their actions are actually causing people to have less confidence – talk about irony.

Erstwhile leader of ISIS, Sheikh Abu Bakr Al-Baghdadi has declared himself Caliphate, Amir Al-Mu'minin - Leader of Believers, as militants bear down on Baghdad. This comes as the extremist group demands that all Al-Qaeda and Jihadi branches must now pledge allegiance to ISIS.. if not there are consequences as nine rebels have been crucified for being too 'moderate' or accused of receiving support from Western powers. We suspect this may slow 'demand' for Obama's latest cunning plan to offer 'aid' to only "moderate" terrorists.

"If you're not concerned, you're not paying attention" say Axel Merk, founder and Chief Investment Officer of Merk Funds (and former President of the Federal Reserve Bank of St Louis and a former FOMC member). Like many, he sees today's excessive high-price, low-volume, zero-volatility markets as an unnatural and dangerous result of misguided intervention by the Federal Reserve... "Now, the capital base and the equity of the Fed is very small. Odds are that the losses would wipe out the equity at the Fed."

Is it any wonder we are where we are when no lesser esteemed group than The American Bankers Association Education Foundation offers this sound advice for 'divvying up a dollar'...

The greatest problem we have is misinformation. People simply do not comprehend why and how the economic policies of the post-war era are imploding. This whole agenda of socialism has sold a Utopian idea that the State is there for the people yet it is run by lawyers following their own self-interest. Even confiscating all the wealth of the so-called rich will not sustain the system. Consequently, we just have to crash and burn and start all over again.

A thumbnail sketch of the main events of during the week ahead.

"I am definitely concerned. When was [the cyclically adjusted P/E ratio or CAPE] higher than it is now? I can tell you: 1929, 2000 and 2007;" warned Bob Shiller this week, adding that "it's likely to turn down again, just like it did the last two times." As John Hussman reminds us this week, stock valuations now reflect not only the absence of any interest-competitive component of expected returns, but the absence of any expected compensation for the greater risk of stocks, which is not insignificant – as investors might remember from 2000-2002 and 2007-2009 plunges, despite aggressive easing by the Federal Reserve throughout both episodes. Investment decisions driven primarily by the question “What other choice do I have?” are likely to prove regrettable.