As a distant but interested observer of history and investment markets, Marc Faber is fascinated how major events that arose from longer-term trends are often explained by short-term causes.; and more often than not, bailouts (short-term fixes) create larger problems down the road, and that the authorities should use them only very rarely and with great caution. Faber sides with J.R. Hicks, who maintained that “really catastrophic depression” is likely to occur “when there is profound monetary instability — when the rot in the monetary system goes very deep”. Simply put, a financial crisis doesn’t happen accidentally, but follows after a prolonged period of excesses (expansionary monetary policies and/or fiscal policies leading to excessive credit growth and excessive speculation). The problem lies in timing the onset of the crisis.
Western central banks have tried to shake off the constraints of gold for a long time, which have created enormous difficulties for them. They have generally succeeded in managing opinion in the developed nations but been demonstrably unsuccessful in the lesser-developed world, particularly in Asia. It is the growing wealth earned by these nations that has fuelled demand for gold since the late 1960s. There is precious little bullion left in the West today to supply rapidly increasing Asian demand, and it is important to understand how little there is and the dangers this poses for financial stability.
With the world almost in total agreement that rates can only go up, that the 30-year bull market in rates is over and a return to "normal" rates is timely, perhaps a glance at the following chart of 700 years of government bond yields will enlighten a little as to where the anomalies and what the "normal" is. All too often investors are caught up in their cognitive dissonance-driving recency bias when a bigger picture may just help those who always proclaim to invest for the long-term.
With just a tad more than three weeks left in the year it is time to start focusing on what 2014 will likely bring. Of course, what really happens over the next twelve months is likely to be far different than what is currently expected but issuing prognostications, making conjectures and telling fortunes has always kept business brisk on Wall Street.
End America’s central bank because it caused the crashes of 2008, 1987, and 1929 and will blunder again. That’s what many critics are saying about the Federal Reserve System (the Fed), which turns 100 on December 23. They note that on the Fed’s watch America has endured numerous bubbles, crashes, and inflationary cycles that have greatly devalued the dollar. The Fed, they say, has caused or aggravated several crashes. “If you say the goal of the Fed was to prevent calamities, then you have to say that it has been a failure,” says William A. Fleckenstein. “History and current experience,” Joe Salerno adds, “reveal to us that groups endowed with a legal monopoly over any area of the economy are prone to use it to the hilt to enrich themselves, their friends and allies.”
As equities celebrate today's better than expected jobs report (for now), apparently comfortable in the knowledge that it's good-enough-but-not-too-good, we are reminded that just six short months ago, none other than the Fed chairman himself uttered these crucial words during his June 19th press conference:
"...when asset purchases ultimately come to an end the unemployment rate would likely be in the vicinity of 7%"
So here we are at 7.0%... and no taper in sight as excuse after excuse is rolled out for keeping the floodgates open. Whocouldanode? This appears to right up there with "subprime is contained", "nobody really understands gold", and "tapering is not tightening." But still we are supposed to give great credibility to their forward guidance?
Stocks initial knee-jerk "good news is bad news" reaction was a 0.5% plunge in prices and the rest of QE-sensitive assets also reacted in a "taper" way with gold dropping, USD soaring, and bond yields spiking. But the USD strength implied JPY weakness and that just provided the momo ignition for carry traders to lift stocks 1% straight up as the heads-I-win, tails-you-lose trade continues. Gold has retraced some of its losses but the USD and bonds are stil under pressure as the US open approaches.
- Nelson Mandela: 1918-2013 (Reuters)
- South Africans Flock to Nelson Mandela’s Home to Mourn His Death (BBG)
- Hillary Clinton or Joe Biden? Obama says won't choose between them for 2016 (Reuters)
- Fukushima water tanks: leaky and built with illegal labor (Reuters)
- Sears Holdings Files to Spin Off Lands' End Business (WSJ)
- Way cleared for landmark global trade deal (FT)
- U.S. Oil Prices Fall Sharply as Glut Forms on Gulf Coast (WSJ)
- German Factory Orders Decline in Sign of Uneven Recovery (BBG)
- FCC Unlikely to Bless a Comcast-TWC Deal: Regulator (WSJ)
Futures Pushed Higher On Weaker Yen, But All Could Change With Today's "Most Important Ever" Jobs NumberSubmitted by Tyler Durden on 12/06/2013 06:58 -0500
The latest "most important payrolls day of all time" day is finally upon us. Of course, this is a ridiculous statement: considering that the average December seasonal adjustment to the actual, unadjusted number is 824K jobs, it will once again be up to the BLS' Arima X 13 goal-seeking, seasonal adjusting software to determine whether the momentum ignition algos send stocks soaring or plunging, especially since the difference between up and down could be as small as 30K jobs. As Deutsche Bank explains: " today's number is probably one where anything above +200k (net of revisions) will lead to a further dip in risk as taper fears intensify and anything less than say +170k will probably see a decent relief rally after a tricky week for markets. Indeed yesterday saw the S&P500 (-0.43%) down for a fifth day - extending a sequence last seen in September." And then consider that nearly 30 times that difference comes from seasonal adjustments and it becomes clear why "farcial" is a far better definition of labor Friday.
JGB Futures prices are dropping in a manner eerily reminiscent of the May period of debacle before the BoJ started to regain control. The catalyst for today's biggest bond price drop in 3 months is Takatoshi Ito's comments demanding the Government Pension fund starting greatly rotating from bonds to stocks: "Now is the right time to sell, while the BOJ is buying.”
*JAPAN'S GPIF NEEDS TO START SELLING BONDS, SHOULD REDUCE LOCAL BONDS TO AS LITTLE AS 35%, RAISE JAPAN STOCK HOLDINGS TO 18% NOW, ITO SAYS
Stocks bounced higher initially but are losing most of those gains as bonds hit low prices of the session (and fears re-arise that the BoJ is not in total control after all). As we warned before, the JGB market is "dead" for all intent and purpose and there is simply not enough liquidity to support any significant selling pressure. JGB 10Y Yields are the highest since Oct 1st.
Nearly a year ago, we penned "Return = Cash + Beta + Alpha": in which we performed "An Inside Look At The World's Biggest And Most Successful "Beta" Hedge Fund. The fund in question was Bridgewater, and Bridgewater's performance was immaculate... until the summer when the sudden and dramatic rise in yields as a result of the Bernanke Taper experiment, blew up Bridgewater's returns for 2013 and at last check, at the end of June, was down 8% for the year. As further explained in ""Yield Speed Limits" And When Will "Risk Parity" Blow Up Again", an environment in which rates gap suddenly higher (and in the current kneejerk reaction market all moves are purely in the form of gaps as risk reprices from one quantum to another in milliseconds) is the last thing Ray Dalio's strategy wants. Be that as it may, and successful as Dalio's fund may have been until now, tonight James Montier of Jeremy Grantham's GMO takes none other than Bridgewater to task, in a letter in which among other things, he calls risk parity "just old snake oil in new bottles", and sums up his view about the strategy behind Bridgewater in the following equation:
Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea
and proceeds to skewer it: 'At a fundamental level, risk parity is the antithesis of everything that we at GMO hold dear. " Read on for his full critique.
"There are going to be consequences to central bank balance sheet expansion all over the world," Kyle Bass tells Steven Drobny in his new book, The New House of Money, adding "It’s a beggar-thy-neighbor policy, but everyone is beggaring thy neighbor." The Texan remains concerned at QE's effects on wealth inequality and worries that "at some point this is going to ignite and set cost pressures off." While Gold-in-JPY is his recommended trade for non-clients, his hugely convex trades on Japan's eventual collapse remain as he explains the endgame for his thesis, "won't buy back until JPY is at 350," and fears "the logical conclusion is war."
In every organization, including the Chinese Communist Party, there are forces of movement and forces of order. The forces of movement have moved into ascendancy in China and this was signaled by establishment of the special economic zone in Shanghai and the program emerging from recent Third Plenary Session. However, the uncertainty over implementation kept domestic and foreign investors cautious.
It wasn't long after three former General Electric Co. executives were convicted of rigging auctions for municipal-bond investment contracts that they received the ultimate sendoff: A 7,400-word torching in Rolling Stone magazine by Matt Taibbi, the writer who branded Goldman Sachs Group Inc. with the nickname "vampire squid." "Someday, it will go down in history as the first trial of the modern American mafia," Taibbi began his June 2012 opus about Dominick Carollo, Steven Goldberg and Peter Grimm. "Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street." Then came a surprise last week, right before Thanksgiving. A federal judge ordered the men released from prison.
The better-than-expected data in the US had the requisiste good-news-is-bad-news reaction as stocks dumped (giving back all the EURJPY-driven gains), Treasury yields jumped, and gold and silver tumbled (in a deja vu of the last time Bitcoin and gold reached parity). At the same time, Draghi cut inflation forecasts, raised downside risks, hinted at less likelihood of another LTRO and noted negative rate discussions but did nothing and that sent EUR higher and implicitly USD broke lower. European stocks are also in trouble once again (even as European sovereign bond spreads are holding steady in their illiquid way). With EURJPY pausing (on Draghi's comments), we look to USDJPY to provide the requisite lift at the cash open in the US...