Archive - Jun 2014 - Story

In President Obama's speeches this year, a steady theme has been creating jobs and economic opportunity for Americans. Yet during the more than five years Mr. Obama has been in office, young people have been especially hard-hit by the slow and virtually jobless recovery. On a deeply human level, it's profoundly sad. The message to Obama - "The bottom line on labor: Make something less expensive and businesses will use more of it. Make something more expensive and businesses will use less of it."

As student loan bailouts rain down from Washington, we thought it may be useful to consider where the world's wealthiest University alumni are. As Private Wealth reports, following a survey of 70,000 millionaires around the world, eight of the top ten universities with the highest number of rich alumni are based in the U.S., with the U.K. home to the other two. Engineering degrees produced the most millionaires, although most engineering grads made money as entrepreneurs, the study revealed. MBAs, law, accounting, and finance degrees also led to financial success.

Financially speaking, Japan is fast becoming a Keynesian dystopia. Its entire economy is now hostage to a fiscal time bomb. Namely, government debt which already exceeds 240% of GDP and which is growing rapidly because even the recent traumatic increase in the sales tax from 5% to 8% does not come close to filling the fiscal gap. Moreover, even at today’s absurdly low and BOJ rigged bond rate of 0.6% nearly 25% of government revenue is absorbed by interest payments. Now comes the coup de grace, as Kyle Bass predicted, Japan’s savings rate has collapsed and its vaunted current account surplus is about ready to disappear.

Just how badly is Generation X doing? Bad enough to turn around the entire concept of middle-class prosperity in America - one where every next generation should do better than the preceding one - on its head. "Only one-third of Generation X households had more wealth than their parents held at the same age, even though most earn more, The Pew Charitable Trusts found." And there, in a nutshell, is your so-called recovery: two thirds of an entire generation - one which is in its prime working years - doing worse than the one before them!

Across the world, the number of people who say the economic situation in their country is "bad" is climbing - despite the much-vaunted recovery we all keep hearing about from politicians. It seems though, as Grant Williams explains in great detail, that the voice of the people is on the rise. This is a problem, because whilst the anti-EU bloc failed to get enough seats to derail the bureaucracy of Brussels, they did win enough to create some serious waves and make it far harder to railroad through policy the next time the wheels on the wagon start to wobble... and wobble it is. Shameless politicians who are willing to put aside technicalities such as the truth and a voting population that is tired of the status quo and looking for a change? The conscious uncouplings may have only just begun...

Why have we turned our backs on the principles that this nation was founded upon? Many of those that founded this nation bled and died so that we could experience "life, liberty and the pursuit of happiness". And yet we have tossed their ideals aside as if they were so much rubbish. Our founders had experienced the tyranny of big government (the monarchy) and the tyranny of the big banks and feudal lords, and they wanted something very different for the citizens of the new republic that they were forming. Most people are under the illusion that the United States has a "capitalist economy" today, but that simply is not accurate. At best, we have a "mixed economy" that is becoming a little bit more socialist with each passing day. What we are doing right now is clearly not working. So why don't we go back and do the things that we were doing when we were extremely successful as a nation?

The recent decline in US yields appears to have run its course and given Citi's outlook for a better employment dynamic in the US, they expect yields to trend higher at this point. Citi's FX Technicals group remain of the bias that the normalization of labor markets (and the economy) will lead to a normalization in monetary policy and as a result significantly higher yields in the long run. Might the shock be that the Fed could be grudgingly tightening by late 2014/early 2015 (an equal time line to the 1994-2004 gap would suggest end November 2014) just as it was grudgingly easing by late 2007 despite being quite hawkish earlier that year? However, given the "treacherous market conditions" we suspect Citi's hoped-for normalization won't go quite as smoothly as The Fed hopes.

Day in, day out, we hear it... It's "the most unloved rally"; Stocks are in "the Rodney Dangerfield rally"; there's still all the "money on the sidelines." Well, it seems, judging by Investors Intelligence surveys of those "not bullish" (bearish or expecting a correction), that investors have never (ever) been more lovingly, respectfully, all-in with this rally... (but that's just the facts speaking - not the asset-gathering, always stay long, commission-snatching soundbites).

Last Thursday, the European Central Bank (ECB) took the historically unprecedented step of lowering certain of its interest rates below 0%. In a report immediately following the announcement, Peak Prosperity's Chris Martenson likened the move to the policy equivalent of dropping a neutron bomb. In the days following, despite the ECB attempting to clarify its stance further, many questions still linger; most notably: What exactly will the implications of this negative interest rate (NIRP) policy be? Alasdair Macleod lays things out in black as white as much as is possible; explaining exactly what steps the ECB is undertaking, what the most probable ramifications will be, and where the highest degrees of risk now lie..."The ECB now finds itself on the cusp of this failure. Remember, there are some very big banks with gearing over 40-50 times. All you need is a fall in prices of 1%, 2%, or 3% for a few companies to go bust, and then those banks are no longer solvent. It is a nightmare scenario. It really is."

Brazil wins the world cup... according to Bloomberg, 171 economists, and Goldman Sachs. They beat Spain, Germany, or Argentina in the final respectively but as one survey participant noted, "It’s kind of hard to bet against Brazil -- they have home advantage, the climate, crowd and recent record." Goldman's 'model' implies a 48.5% chance that Brazil wins it all (with Argentina 2nd most likely to win at 14.1%). While all eyes will be on Ronaldo, Goldman's Dream Team is dominated by 3 Brazilians (including Neymar of course) but based on the 6-factor Poisson distribution-based regression model, Goldman predicts the scores of every game (and Bloomberg's interactive graphics allow to create your own bracket). If only the Brazilian people were so certain about their futures...

"I am not God, I am not here to judge who is right and who is wrong, but if you look at geopolitics in Asia from a Chinese perspective, its completely unacceptable in the long run to have American military presence in Asia," blasts Marc Faber.

"As a large power like France and Britain and America, you might be able to push around small countries, but you can't push around a country that has twice the population of Europe and the United States, and has become a relatively modern state with military that is very powerful."

It's that time in the quarter when DoubleLine's Jeff Gundlach spends over an hour discussing the markets, the economy, and his outlook for what he believes may be the best investment strategies and sector allocations for both his funds and in general.

As usual readers can listen in for free after registering at the following link.

"Treasury-selling" Tuesday came and went and for the 2nd week in a row, bond yields rose (+2-3bps) following the 7th losing Monday in a row. Equity markets languished amid dismal volumes but were rangebound all day apart form AUDJPY and VIX-driven pumps to try and close green and keep the Tuesday dream alive (and the running count of new all-time highs). The USD jumped once again as EUR tested lower (near Draghi spike lows). Gold and silver saw a squeeze higher at the open this morning and maintained gains (as fears of CCFD unwinds spread) but copper rose as WTI crude touched 9-month highs then reversed sharply lower. As we forecast this morning, a mid-day VIX plunge and late-day JPY tumble (and another VIX plunge) sparked just enough exuberant buying panic among the machines to manipulate stocks to a green close and save the Tuesday plan. Stocks have fallen only 2 days in the last 3 weeks...

Thanks to free and abundant credit to those at the front of the line, home prices have soared in the last few years as "smart" hedge fund managers have bought homes-to-rent in a yield-grab with both hands and feet. This - as we have noted numerous times - priced out the 'real' buyer; who this time, instead of being driven by a "fear of missing out", would rather not play (only to be left holding the bag). Another unintended consequence courtesy of The Fed's "main-street-helping" actions that has destroyed the American Dream for a declining middle class. Fewer Americans think it's a good time to buy a home than at any time in the last 4 years... "recovery"!

Employment in the United States is becoming increasingly polarized, growing ever more concentrated in the highest- and lowest-paying occupations and creating growing income inequality. As the Dallas Fed explains, market changes involving middle-skill jobs in the U.S. are hastening labor market polarization. So-called "Routine" jobs have declined from 58% of employment in 1981 to 44% in 2011, while both types of non-routine jobs have expanded. Since 1990, none of the routine jobs lost in these downturns came back in the following expansions. This is a problem since middle-skill, routine jobs still account for almost half of all existing jobs; and as the Dallas Fed concludes, the pace of labor market polarization is unlikely to slow down anytime soon.