Archive - Sep 4, 2010 - Story

"Welcome to Wall Street Executive Air flight 2009 with service to Economic Disaster." All you need to know about the endangered species of Wall Street Faticus Caticus, and why it is about to cannibalize itself into oblivion, in a simple cartoon even Saturday night drunks can comprehend.

The other day, I came across an article that said, while individuals may be moving their money out of equities, they have been moving into bond funds – and in a big way. It’s called jumping from the frying fan into the fire. Based on my experience as a co-founder of a mutual fund group, I can tell you that if there is one sure thing in this world, it’s that when investors rush en masse into an investment category, it is invariably at almost exactly the wrong time to do so. Is that the case with today’s rush into bonds? To shed some light on that point, Casey Research Switzerland-based editor Kevin Brekke volunteered to look into the correlation between bond flows and performance. Here’s his report…

In his most recent Popular Delusions piece, SocGen's brilliant Dylan Grice once again rightfully demolishes the shamanic rituals of the "alternate universe" theory, better known as economics, ridicules economists for the hack priests of financial paganism they are, and concludes what may be the key principle of modern cynical thought: "Some have said that the key risk investors face today is of ‘policy error’. But isn’t that always the key risk? Financial history is one long series of ‘policy errors’ and while policy makers labour under the delusion that they know the unknowable it will remain so. All investors can do is try to see the funny side, and focus on things we can know." Incidentally, focusing on the funny side is precisely what Zero Hedge has been doing for just over a year and a half (much to the dismay of our ever growing detactors and critics). Add some intelligence to the discourse, and one gets in 18 months more actual policy changes (Fed Audit, the end of Goldman Prop (a topic we were digging into long before Volcker was resurrected from the dead), banning Flash trading, inquiry into High Frequency Trading and daily market manipulation), more than others who in lengthy, rambling, somnolent, rants and essays have achieved in decades. Since mixing humor and "focusing on what we know" is all we know, we will continue doing it, until we succeed in terminally discrediting the most worthless voodoo "science" ever conceived by man - economics, and overturning its one most destructive construct - the central bank and the implicit central planning that goes side by side. But in the meantime, here is Dylan's most recent fusion of humor and scathing condemnation of the idiots who will gladly destroy the US economy in their pursuit of a theory which is proven to be more and more flawed, fake and destructive with each passing day.

One of the most peculiar observations of this depression started in December 2007 is that while the total US population has increased by 6.8 million from 303.3 million to just over 310 million in July 2010, over the same 32 month period, the civilian labor force has declined from 153.9 million to 153.6 million. This makes zero sense, as all those aging into working age, or immigrating into the US need to find some job or some other paid activity (either legally or illegally). But let's assume that due to discouragement with economic conditions people simply refuse to look for jobs. The reality is that eventually all those people will come storming into the job market, once the economy recovers sufficiently. Which is why we make an estimate of what the "fair value" of the civilian labor pool is based on the historical average participation rate of 50.4% (as a percentage of total population). Backing into the cumulative population growth by this estimate, means that as of July 2010, the labor force has really grown by 3.4 million, once the one-time adjustment of a "recession" is eliminated (and after all that's what all modern economist claim right - that recessions are merely one-time blips on the road to perpetual Keynesian growth). In other words, the cumulative differential between the labor force as reported, and as calculated has hit an all time record of 3.7 million: this is a number that has to be added to the 7.6 million directly tabulated unemployed to get a sense of just how many jobs have been lost assuming a reversion to the mean for the US economy. In other words, after eliminating the statistical voodoo of the BEA and the Census Bureau, the US has lost just over 11.2 million jobs since the start of the recession.

I started looking at this issue back in May, as you can tell by the charts. As the baseline scenario for the economy looks weaker, it’s worth looking again at where the center scenario is situated and reposition. I didn’t look at futures because a lot of people don’t’ use them. I didn’t look at long training periods because most ETFs haven’t been around for too long. As with any pairs, relationships are probably fragile out of sample. I paired some commodity stocks with commodity ETFs on charts to see what they looked like. It is clear that not every commodity ETF is just a beta generator. Grain ETFs are less volatile than the stock I paired. GLD and Barrick look cointegrated with GLD outperforming over nearly the whole time series. Copper and CME look like a classic example of assets with the same drivers and different vol attributes. Stock vol is a slow climb up with abrupt downdrafts. Commodity vol is fast up and fast down. In these simple comparisons, oil is unique in reflecting inflation expectations and cost-pull factors. Or maybe I just picked a rotten pair. You decide.

Recently there has been a surge in cherry picked employment charts highlighting that the Obama administration has done a great job in rescuing the economy. The premise goes: after dropping to as much as 700K+ jobs lost per month, the administration has managed to pull off a miraculous recovery and now we are riding on a wave of 8 consecutive "private jobs" beats in a row. This argument is so shallow we won't even bother with it. Perhaps the "economists" who espouse this theory will be so kind in their next iteration of their charts to overlay the monthly US debt issuance side by side with the jobs number. Because you see if you drown the economy in unrepayable debt, while using transfer payments to fund the digging of trenches by every man, woman and child who makes up the labor pool, then yes - you may get 0%, or even negative, unemployment overnight. Will it bankrupt the country (even faster)? Why, of course. But whoever said those who discuss politics subjectively ever care about the long-term implications of reality. So in the vein of sharing pretty charts, here is one: we show job losses since the beginning of the Recession (excluding for the impact of census hiring), juxtaposed to the natural growth rate of the Labor Pool (and not the artificial one, which according to the BLS is the same now as it was a year ago). We discover that i) 7.6 Million absolute jobs have been lost since the beginning of the Recession; ii) that a record 10.5 Million jobs (and you won't find this statistic anywhere), have been lost when factoring in for the natural growth of the Labor Pool of 90-100K a month (we use the lower estimate, which also happens to be the CBO's estimate), and that iii) assuming we expect to return to the jobs baseline level as of December 2007 (or an unemployment rate of 5%) by the end of Obama's second term (and we make the big assumption there will be a second term), Obama needs to create 230,000 jobs each and every month consecutively from September through November 2016 in order for the total jobs lost to be put back into the labor force, and that iv) an optimistic (if more realistic) projection of jobs returning to the work force means the return the baseline will occur in 2019, some 7 years after the start of the last recession. The point of these observations is not to cast political blame on either party: we are in this predicament due to the combined stupidity, corruption and greed of both parties. The question is how do we get out of here. And unfortunately for all those hoping that a return to a normal, baseline past is possible, please forget it (i.e., the New Normal is really real), at least for the next 7 years. This also means that any charting, technical analysis and other "reversion to the mean" approaches of forecasting the future will all end up sorely lacking and misrepresenting the final outcome.

Goldman's David Kostin, as usual, provides this week all you can eat chart buffett. In this latest edition we also find out that Goldman is also very good at hedging for every possible outcome: while calling for 1,200 on the S&P by year end (and 1,160 in three months, meaning in December the market will have to rise by 40 points), Kostin also admits that recommended sectors have generated -42 bps of alpha YTD, the recently introduced low operating leverage trade was down 1.9% in the past week, the long dividend growth stocks strategy lost 0.7%, yet all this was hedged with a long BRIC sales trade (up 1.1%), and a long Sharpe ratio strat (up 0.8%). Of course, all those strategies will likely net out to zero on a weekly basis going forward, as Kostin now has all bases covered. Some observations: "The S&P 500 was up 4.2% this week. Materials was the best performing sector this week (+6.0%) while Consumer Staples was the worst performing sector (+2.4%)." This is only fitting as Materials was the sector most beaten down going into the last week of August, and there is nothing like a little short covering rally to pass for a new bull market. All this and more inside.