At 9pm Eastern, the first of many presidential debates will begin, whose ultimate goal will be to validate in the minds of those 47% or so (aka the very loud minority) who intend to vote for the next president, that they have made the right choice. They haven't (for the reason, or rather 16,171,037,343,409 reasons, see here: neither candidate can do anything at all to prevent the debt crisis iceberg that America is careening into full speed, and which nobody could have foreseen). But it sure makes for great theater, and even better drinking games. So fire up the Interwebs, prepare your Tungstenschläger IV drip, lean back in your favorite easy, bought on credit, and soon to be repossessed chair, and be distracted, unknowing that during the duration of the debate, the US raked up another $200-$300 million in public debt (depending on the frequency and duration of the commercial breaks).
Far be it from us to encourage excess consumption; but, should you feel the need to numb yourself a little during the ensuing battle-royale between Obama and Romney, we present - for your imbibing pleasure - the official drinking game of the 2012 election debates.
Four years ago today, the Troubled Asset Relief Program was signed into law. We thought it timely to take stock of different asset price levels with respect to that magnificent day in the history of our country as well as how a broad cross-section of global asset markets have performed relative to their pre-crisis peaks. Of the major US banks, Wells Fargo has done the best (-2.3%) while BofA and Citi are worst (down ~80%). As Goldman notes, two features stand out when we look at the broad markets: asset markets that have outperformed and are closer to pre-crisis peaks are either ‘defensive’ in some way, or have benefited inadvertently from the ‘Great Easing’ in response to the crisis. From precious metals and Swedish and Canadian house prices at the top to European bank stocks and US Growth at the bottom; 'hard assets' and 'defensives' combined with central bank yield compression has, as we would expect, dominated performance.
Fed Confused Reality Doesn't Conform To Its Economic Models, Shocked Its Models Predict "Explosive Inflation"Submitted by Tyler Durden on 10/03/2012 - 17:04
Below are several excerpts only the brains of those practicing the world's most useless profession (and we are very generous with that assessment) could possibly come up with, in attempting to explain the shocking outcome of reality continuously refusing to comply with their exhaustive and comprehensive Dynamic Stochastic General Equilibrium models.
Given that policymakers seldom if ever experimented with forward guidance this far in the future, there is little data to guide them. The problem, however, is that these DSGE models appear to deliver unreasonably large responses of key macroeconomic variables to central bank announcements about future interest rates (a phenomenon we can call the "forward guidance puzzle")
But the absolute punchline you will never hear admitted or discussed anywhere else:
Carlstrom et al. show that the Smets and Wouters model would predict an explosive inflation and output if the short-term interest rate were pegged at the ZLB (Zero Lower Bound) between eight and nine quarters.This is an unsettling finding given that the current horizon of forward guidance by the FOMC is of at least eight quarters.
In short: the Fed's DSGE models fail when applied in real life, they are unable to lead to the desired outcome and can't predict the outcome that does occur, and furthermore there is no way to test them except by enacting them in a way that consistently fails. But the kicker: the Fed's own model predicts that if the Fed does what it is currently doing, the result would be "explosive inflation."
Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, we estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation. The rial’s death spiral is wiping out the currency’s purchasing power
The most recent shelling on 3 October 20l2, which caused the death of five Turkish citizens and injured many, constitutes a cause of greatest concern for, and is strongly condemned by all Allies.
In the spirit of indivisibility of security and solidarity deriving from the Washington Treaty, the Alliance continues to stand by Turkey and demands the immediate cessation of such aggressive acts against an Ally, and urges the Syrian regime to put an end to flagrant violations of international law.
Just as we had suspected for months, Bernanke's attempt to herd cats and to drive retail investors into equities is now a complete and unmitigated catastrophe. According to just released ICI data, in the week ended September 26, the second full week after the announcement of QE3, retail investors pulled $5.1 billion from domestic equity funds, following a massive $4.8 billion outflow the week prior, and the most in 2 months. This is also the sixth largest weekly outflow in 2012 to date, a year in which over $100 billion has already been pulled from equity mutual funds. And since we now know that Bernanke's only motive for QE3 is to stimulate a wealth effect and to push everyone into the broken casino, where such trading farces as Kraft's flash smash today, as Knight Capital's implosion a month ago, and FaceBook's IPO, not to mention the virtually daily Flash Crash in at least one name, have killed every last shred of faith in equities, it can be safely said that QE3 has failed three short weeks after being launched. As to where the money did go: why taxable bonds of course - not even the "dumb money" is that dumb to go where the Fed tells it to, and instead merely does what the Fed does: it keeps on frontrunning the Fed's monetization of the US deficit, which is now going on for the 3rd year in a row. Eventually "this time may be different." But not yet.
It wouldn't be the new normal markets if something freaky did not happen. WTI crude was crushed lower (back under $88) and now down almost 10% from pre-QEternity on supply build (totally ignoring the Iran and Syria-Turkey SNAFUs). HPQ stunned investors back to reality and fell 13% to nine-year lows. AAPL did it again - same 310ET time, same velocity of liftathon - which dragged indices up off what could have been a red close. Equities entirely disengaged from risk-assets soon after the US equity open this morning and never looked back as Treasury yields pushed higher into the open and slid lower all day, the USD rose quietly all day long, and gold drifted sideways to modestly higher on the day. VIX limped lower on the day but on the week stocks are up around 1%, Treasury yields down 1-2bps, USD unchanged, and gold/silver marginally higher (with WTI -4.6%). Healthcare and Financials are up around 1.75% on the week with Materials and Energy down 0.6%. Gold and Stocks are recoupled.
While Bernanke may see deflation here and there, and everywhere, don't tell that to your average NYC commuter (or anyone else for that matter who can't simply expense all non-core activities, such as living and getting around to the taxpayer debit card), who has seen relentless fare hikes by both the MTA and, recently, taxi cabs. But that is only the beginning. While according to a report issued by the State Comptroller Thomas DiNapoli total cost inflation between 2007 and 2015 will hit at least 35%, it is after 2015 that things get really aggressive. According to Reuters, New York's Metropolitan Transportation Authority will need at least $20 billion from 2015 to 2019 to keep its system in good repair, but the mass transit operator has yet to figure out how to pay for these upgrades, a report said on Tuesday. (For those unaware the MTA, the largest U.S. mass transit system, runs New York's buses, subways, commuter railroads and some major bridges and tunnels). As for how the MTA will fund its massive CapEx spending here is the simple answer: it will request, some time in 2015, that then president Barack Obama bail it out, to which he will promptly comply. After all, with total US debt crossing $23 trillion shortly thereafter, who will care about some paltry $20 or even $200 billion (as the number will eventually be revised to).
It seemed yesterday's channel-stuffed and hope-ridden car-maker data in the US was seen by some as evidence that we are right back on track. However, ever ready to separate the reality from the fantasy, we offer the following charts, via Barclays' Julian Callow, that vividly illustrate the rapid decline in the pace of auto registrations (the actual end-users that is) over the past year. In particular, Callow notes, the pace of seasonally-adjusted auto registrations in Q3 for the four largest European countries was the weakest in the series history (back to 1995).
Equity prices - and more specifically valuations - are becoming increasingly disconnected from economic reality. As Bloomberg's Jo Brusuelas notes though the Fed may be driving up asset prices without achieving their end goal of improving economic conditions - based on a number of recent economic surprises. As earnings expectations and a global slowdown continued to point to recessionary outcomes (with industrial and consumer data weak), the probability of a fundamental mispricing in stocks and bonds grows. But when we look over the medium-term at how bonds and stocks react to negative and positive economic surprises over time, it is more than abundantly clear that not only is the bond market more sensitive-to and reflective-of the economic state of the world (and its expectations) but the equity markets remain significantly less sanguine about reality (about 20% less!!).
So the Fed is pinning its hopes on stimulating the economy via the wealth effect again, as it did when it revived the post-tech-wreck asset bubble in housing and credit in that now infamous 2003-07 period of radical excess. But here's the rub. While there is a wealth effect on spending, the correlation going back to 1952 is only 57%. But the correlation between spending and after-tax personal incomes is more like 75%. The impact is leagues apart. And that is the problem here, as we saw real disposable personal income decline 0.3% in August for the largest setback of the year. The QE2 trend of 1.7% is about half the 3.2% trend that was in place at the time of 0E2. Not only that, but the personal savings rate is too low to kick-start spending, even if the Fed is successful in generating significant asset price inflation. The savings rate now is at a mere 3.7%, whereas it was 6% at the time of QE1 back in 2009 and over 5% at the time of QE2 2010 — in other words, there is less pent-up demand right now and a much greater need to rebuild rather than draw down the personal savings rate. This is a key obstacle even in the face of higher net worth.
With precious metals once again on the rise, the questions begin as to whether or not gold is in a bubble. While these questions never seem to occur among the cogniscenti when equity prices race ahead non-stop for months on end with no volatility, Brent Johnson (of Santiago Capital) offers up five 'facts' that help to explain why gold at $1800 is far from a bubble - especially as central banks shift from 'measured' responses to open-ended debauchment.
Despite being told again and again by any-and-every commission-taker and newsletter-vendor that sentiment is terrible, managers will need to high-beta performance-chase, and the 'money-on-the-sidelines' is just around the corner; it appears that reality is different. The Net Long Interest in S&P 500 Futures (the most liquid equity trading vehicle in the world) is now at its highest since December 2008. The last time investors were this 'net long', the S&P 500 fell over 25% in the next two months.
Those who rally behind the modern concept of America rally behind a façade — an empty shell devoid of the heart and soul that gave life to this once great experiment. It is time for us to decide what kind of Americans we wish to be: the deluded rah-rah puppets of a desiccated totalitarian society, or the watchmen on the wall. Will we be the keepers and protectors of the vital core of the American identity, or will we be fly-by-night consumers of the flavor-of-the-day political carnival, eating every tainted sample from the elitist platter in an insane attempt to replace our free heritage with a sleek, sexy, rehashed form of top-down feudalism?