Archive - 2014 - Story

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.

The word “violence” comes with numerous negative connotations. We believe this is due to the fact that in most cases violence is used by the worst of men to get what they want from the weak. Meeting violence with violence, though, is often the only way to stop such abuses from continuing. We tend to discuss measures of non-participation (not non-aggression) because all resistance requires self-sustainability. Americans cannot fight the criminal establishment if they rely on the criminal establishment. Independence is more about providing one's own necessities than it is about pulling a trigger.

Cliff Asness would politely request people stop saying "It's a stock picker's market." While pairwise correlations have dropped to post-crisis lows, they remain elevated to 'normal' levels but, as Asness rages, perhaps asset managers who rely on this 'weak' phrase should more honestly note "I think they mean, "We will have to pick stocks now because the market isn’t making us money the easy way."

Ever since President Nixon broke the US dollar's last link to gold, the world has been set adrift on a sea of fiat currencies that have been increasingly debased, serving the interests of governments and financial elites. While crypto-currencies remain insulated from central bank manipulation, governments have thus far been tolerant, perhaps because their capability to track transactions is more advanced than Bitcoin believers admit. Nevertheless, the advent of crypto-currencies represents the increasing popular demand for a currency insulated from political debasement and bank profiteering. Crypto-currencies represent a legitimate attempt by private citizens to reassert their sovereignty over such government actions. We appreciate the effort, and we believe it holds much promise. But for now, we will stay with the traditional store of value, gold.

Emerging Market equities have tumbled over 4% in the last 2 days on heavy volume. The last time the world experienced a major Emerging Market meltdown, the US was still by far the world's major 'consumer'. However, as the following chart from JPMorgan shows, that is very much not the case anymore and the last few days ugly echoes of the mid-Summer Taper Tantrum in Emerging Markets (most notably Asia), while being shrugged off by most, may be much more important to any sustained global recovery than your friendly local asset-gatherer would ever care to admit.

At this point, the problem of hitting limits in a finite world has morphed into primarily a financial problem. Governments are particularly affected. They find that they need to borrow increasing amounts of money to provide promised services to their citizens. Debt is a huge problem, both for governments and for individual citizens. Interest rates need to stay very low, in order for the current system to “stick together.” Governments are either unaware of the true nature of their problems, or are doing everything they can to hide the true situation from their constituents. The public has been placated by all kinds of misleading stories about how oil from shale will be the solution. Quantitative Easing (used by governments to lower interest rates) has temporarily allowed stock markets to soar, and allowed interest rates to stay quite low. So superficially, everything looks great. The question is how long all of this will last?