Archive - Jan 4, 2014 - Story

The resilience that has long been one of America's remarkable traits was on display in 2013. Not only did businesses create 2 million jobs, but the struggling economy actually grew and profits and stock prices soared to near-record levels. Still, five years into the Obama presidency, the economy is grossly underperforming. Contrary to the dominant media narrative, it's not bad luck or the financial crisis to blame, but bad policies — from the $860 billion "stimulus" that didn't stimulate to the Dodd-Frank financial reform that killed lending. Last year was a challenging one for entrepreneurs and other productive Americans. No fewer than 13 new taxes were put into place. Big government now consumes one of every four dollars of our GDP and is getting bigger. Entering 2014, we face problems, including taxes and spending, that neither the White House nor Congress is addressing. In the following charts, we look at a few of the more alarming and intractable ones.

With Bernanke's term due to expire in January, Jim Rogers warns Mineweb that the Fed-head will be remembered as "the guy who set the stage for the demise of the Central Bank in America. We've had three central banks in America. The first two disappeared. This one's going to disappear too in the next decade." With precious metals, bonds, and stock markets obsessing over Fed actions, Rogers says, in the next 10 years or so, "People will realise that these guys have led us down a terrible path," and collapse is "not a possibility," he adds, "it's a probability."

For a man who spent his entire career, over half a century, generating ~2% inflation leading to the great middle-class wealth transfer known as the "great moderation", and of course the great financial crisis, personally experiencing 40% deflation in under three months must be the supremest of ironies. Oh wait, 40% two weeks ago. Make that 50% deflation as of today... or as the Princeton economics department would say, an annualized deflation rate of #Ref!

While the last two days of relative excitement in the precious metals are noteworthy in their bucking-the-trend of recent months, there is perhaps a much more critical 'trend' that may finally allow the demand for physical gold to peer through the veneer of synthetic paper pricing. As JPMorgan notes, speculative positions (defined CFTC net longs minus shorts) have dropped to record lows in the last few weeks. With ETF gold holdings back below 'Lehman' levels and gold coin sales elevated, perhaps the Indian government's (and most of the Western world's Feds) hope for the death of the precious metals market is greatly exaggerated...

"Members of Congress have the same privacy protections as all U.S. persons" - NSA

When risk vanishes, so does creativity.

Forget the last two day's decline.  The consensus opinion for 2014 is pretty uniform: stocks will go up modestly, bond will decline in similar fashion.  Job growth will grind higher, as will inflation.  The Fed will taper its bond-buying program, slowly.  And so it may all come to pass...  But ConvergEx's Nick Colas ponders what could go wrong, or at least different.  Top of his list: fixed income volatility, in conjunction with stock market valuations that are, at best, average. Colas reflects ominously on 1914, where if you read the papers of the day you would have seen much of the same "Yeah, we got this" tone that prevails today.  As the great market sage Yogi Berra once opined, “It’s tough to make predictions, especially about the future.” Either way, a cautious outlook is the better part of valor so early in the year.

Having doubled off the post-PBOC-ban-and-Fed-Taper lows, Bitcoin, trading at USD910 currently is becoming increasingly ubiquitous as a payment method for many businesses. The latest, as NY Post reports, is Manhattan-based real-estate broker Bond New York, is "using Bitcoins to help facilitate transactions." With overseas money-laundering as a key support, and Manhattan apartment sales setting a record in Q4 for volume of transactions (+27% YoY), we suspect the acceptance of Bitcoin will merely ease the Chinese (or Russian) ability to transfer funds directly into NYC housing - blowing an even bigger bubble.

The past can offer clues to the future but it doesn’t give us a blueprint. The bigger message is that today’s valuations don’t bode well for long-term returns, where long-term means beyond the next market peak. Prices could surely bubble upwards from here, but bubbles are invariably followed by severe bear markets. More importantly, we shouldn’t be fooled by traditional valuation measures. P/Es, in particular, have several flaws. We’ve shown in past articles that we get completely different results when we adjust earnings to account for mean reversion. Either way, our conclusions are a far cry from the “nothing to see here” that we keep hearing from the Fed.

Well, it took three years, but finally the Goldman Sachs-based head of the New York Fed, Bill Dudley, admitted what we all knew. From a speech just given by NY Fed's Bill Dudley at the 2014 AEA meeting in Philadelphia:

"We don't understand fully how large-scale asset purchase programs work to ease financial market conditions"

Or, in other words, "we still don't know how QE works." It just does (thank you Kevin Henry). And this coming from the people who want their word to become equivalent to gospel in a time when QE is being phased out and replaced with forward guidance. Luckily, at least the Fed knows all about how "forward guidance" works.

Of the 21 nations covered by PMI "soft data" surveys, only 4 have sub-50 (deceleration) prints - Russia remains at multi-year lows along with France (core Europe?), Australia (but but China?), and Greece. Of course, as Goldman (some of the optimism on the basis of recent manufacturing PMIs... may not square with evidence of a structural break in the link between the PMIs and growth) and BofAML (it's important to understand how crude these surveys are) note, faith in these 'surveys' is often misplaced (and current levels suggest the rolling over is coming soon).

The real life magic-mushroom, banana dictatorship envisioned by George Orwell just went full retard.

Some may have forgotten, or not be aware, that the Federal Reserve system has its own police force. Well, it does: "The U.S. Federal Reserve Police is the law enforcement arm of the Federal Reserve System, the central banking system of the United States.... Officers are certified to carry a variety of weapons systems (depending on assignment) including semi-automatic pistols, assault rifles, submachine guns, shotguns, less-lethal weapons, pepper spray, batons and other standard police equipment. Officers also wear bullet resistant vests/body armor. " At last check, there were over 1000 sworn members of the Fed police force. And judging by the recent spike in appearances of such "help wanted" ads as those shown below, that number is too low. We expect many more job postings such as these to appear in the coming weeks and months: in fact, we are willing to predict that the closer we get to a "renormalization" of the Fed's balance sheet, the faster the hiring of Fed cops...

When it comes to setting the prevailing economist groupthink, nobody does it better than the economists at JPMorgan and Goldman Sachs. Which is why the following chart of projected 2014 GDP growth by quarter in the Developed and Emerging World from JPM, explains succinctly just where the groupthink now expects marginal global growth will come from (Mexico, South Africa, Korea, UK, Italy?). We show it just because the economist consensus is always wrong when it comes to the important inflection points (see ECB rate cut decision, Taper off decision, Taper on, the great financial crisis, "subprime is contained", etc). So for those curious to know what most likely will not happen in the new year, this chart's for you.