A non-bombastic analysis of the events and data in the week ahead, with insulting anyone or resorting to conspiracy theories.
We have argued that it is a perilous myth that central bankers these days control a general price level. They instead incentivize massive financial flows into securities markets and fashionable sectors. Over time, ramifications and consequences reach the profound. For one, excess liquidity promotes over/mal-investment. It’s only the scope and nature that remain in question. If major Bubble flows inundate new technology investment, the resulting surge in the supply of high-margin products engenders disinflationary pressures elsewhere. Policy responses to perceived heightened “deflation” risks then only work to exacerbate Bubbles, mounting imbalances and structural fragilities. This was a critical facet of “Roaring Twenties” analysis that was lost in time.
Regardless of where one thinks the dollar is going in the long-term, here is a discussion of where it will likely go in the short-term.
We’re always interested in alternative economic frameworks that can help address the sizable gaps left open by classical approaches. Behavioral economics can fill part of that void, of course, as it describes some basic shortfalls in the assumption that we’re all superhuman welfare maximizing individuals. One step beyond that is evolutionary economics, which borrows from biology rather than psychology to form models about economic behavior.
Having exposed the reality that the world's capital markets are a manipulated shell game, Janus' Bill Gross has a message for the perpetual bulls in his latest letter to investors - "say a little prayer." Gross continues, "low interest rates are not the cure – they are part of the problem," warning that ZIRP has enabled, "a host of zombie and future zombie corporations now roam the real economy. Schumpeter’s 'creative destruction' – the supposed heart of capitalistic progress – has been neutered. The old remains in place, and new investment is stifled." As he previously warned, when the central bank manipulation is removed the likely trajectory of prices is downward...
- Fed expected to push ahead with rate hike plan (Reuters)
- Upbeat earnings lift European stocks ahead of Fed (Reuters)
- Chevron to Cut 1,500 Jobs (Rigzone)
- Can Windows 10 Revive PC Sales? (WSJ)
- U.S. Junk-Bond Buyers Left in Dark as Private Deals Become Norm (BBG)
- Jeb Bush Drawing Big Bucks From GOP Establishment (WSJ)
- Myriad of Greek Risks Means Money Managers in No Hurry to Return (BBG)
- Gas production at Gazprom set to hit post-Soviet low (FT)
A former BOE employee and Mervyn King speechwriter who went on to a lucrative private sector career as a bond strategist at Deutsche Bank, and then as a hedge fund economist, is now going back to the BOE as a voting member. And that's not all. This revolving door story has a punchline...
Straight-forward discussion of next week's economic data and events, and why it is important for the dollar.
After yesterday's latest drop in stocks driven by "old economy" companies such as CAT, which sent the Dow Jones back to red for the year and the S&P fractionally unchanged, today has been a glaring example of the "new" vs "old" economy contrast, with futures propped up thanks to strong tech company earnings after the close, chief among which Amazon, which gained $40 billion in after hours trading and has now surpassed Walmart as the largest US retailer. As a result Brent crude is little changed near 2-wk low after disappointing Chinese manufacturing data fueled demand concerns, adding to bearish sentiment in an oversupplied mkt. WTI up ~26c, trimming losses after yday falling to lowest since March 31 to close in bear mkt. Both Brent and WTI are set for 4th consecutive week of declines; this is the longest losing streak for Brent since Jan., for WTI since March.
A slow week devoid of virtually any macro news - last night the biggest weekly geopolitical event concluded as expected, when Greece voted to pass the bailout bill which "the government does not believe in" just so the ECB's ELA support for Greek depositors can continue - is slowly coming to a close, as is the busiest week of the second quarter earnings season which so far has been largely disappointing despite aggressive consensus estimate cuts, especially for some of the marquee names, and unlike Q1 when a quarterly drop in EPS was avoided in the last minute, this time we won't be so lucky, and the only question is on what side of -3.5% Y/Y change in EPS will the quarter end.
While this week has been, and continues to be, devoid of macro updates, yesterday's flurry of mostly disappointing earnings releases both before and after the open, including some of the biggest DJIA companies as well as the current and previously biggest and most important companies in the world, AAPL and MSFT, both of which came crashing down following earnings and forecasts that were well short of market expectations, came as a jolt to a market that was artificially priced by central bank liquidity and HFT momo algos beyond perfection. Add to that yesterday's downward revision to historical industrial production which confirmed the US economy is a step away from recession, as well as last night's Crude API inventory build which is once again pressuring WTI lower and on the verge of a 49 handle, and perhaps the biggest question is why are futures not much lower.
If yesterday's market action was boring, today has been a virtual carbon copy which started with the usual early Chinese selloff levitating into a mildly positive close, with the SHCOMP closing just above the psychological 4,000 level: the next big hurdle will be 4058, the 38.2% Fib correction of the recent fall. In the US equity futures are currently unchanged ahead of a day in which there is no macro economic data but lots of corporate earnings led by Microsoft, Verizon, UTX and of course Apple. Most importantly, some modest USD weakness overnight (DXY -0.1%) has helped the commodity complex, with gold rebounding from overnight lows, while crude has at least stopped the recent carnage which sent WTI below $50.
The divergence theme is not longer being eclipsed by the Greek drama and the Chinese stock market slide. See how this week's developments fit into the bigger picture.