The high priests of academic and “official” history love a good villain for two reasons: First, because good official villains make the struggles and accomplishments of good official heroes even more awe-inspiring. And, second, because nothing teaches (or propagandizes) the masses more thoroughly than the social or political lessons inherent in the documented rise and fall of the world's most despicable inhabitants. We get shivers of fear and excitement when we discuss the evils and the follies of ancient monsters like Nero, Attila the Hun, Caligula, etc, or more modern monsters, like Mussolini, Stalin Hitler, Goebbels, Mao, Pol Pot, Idi Amin, and so on. We take solace in the idea that “we are nothing like them”, and our nation has “moved beyond” such animalistic behavior.
"What's more fun than a Barrel of Monkeys? Nothing!" What could be better than assembling a long chain of tangled monkeys, each reliant on those either side of it for purchase, with just the one person holding onto a single monkey's arm at the top end of the chain, responsible for all those monkeys dangling from his fingers. Of course, with great power comes great responsibility; and that lone hand at the top of the chain of monkeys has to be careful - any slight mistake and the monkeys will tumble, and that, we are afraid, is the end of your turn. You don't get to go again because you screwed it up and the monkeys came crashing down. On May 22nd of this year, Ben Bernanke's game of Barrel of Monkeys was in full swing. It had been his turn for several years, and he looked as though he'd be picking up monkeys for a long time to come. The chain of monkeys hanging from his hand was so long that he had no real idea where it ended... indeed, "
If the Fed really thinks that the rest of the world will have to "adjust to us" as it insists on draining global liquidity come what may, it may have a very rude surprise, yet again." One false move and all the monkeys may end up in a heap on the floor.
- Egypt, U.S. on Collision Course (WSJ), Gunmen kill 24 Egyptian police in Sinai ambush (Reuters)
- India’s efforts fail to prevent new rupee low (FT)
- More bad news for AAPL: Steve Jobs Biopic Crashes on Opening Weekend (WSJ)
- "Sustainable" - U.S. Stocks Beat BRICs by Most Ever Amid Market Flight (BBG)
- Merkel cancels election rally after hostage taking (Reuters)
- Some day, Abenomics might work... Not today though: Japan Exports Rise Most Since ’10 as Deficit Swells (BBG)
- China July Home Prices Rise as Nation Seeks Long-Term Policy (BBG)
- Spanish Bank’s Bad Loan Ratio Rises to Record in June (Reuters)
- Recovery... for some - Ferrari NART Spyder Sets $27.5 Million Auction Record (BBG)
- Bund yields hit 17-month high, rupee slumps (Reuters)
- Regulatory Headaches Worsen for J.P. Morgan (WSJ)
‘The bigger they are, the harder they fall’ has always been true and is seemingly even more so today with regard to the BRICs (Brazil, Russia, India and China)
Excessive monetary stimulus and low interest rates create financial bubbles. This is the biggest debt bubble in history. It is a potent deflationary force and central banks are forced into deploying increasingly aggressive (offsetting) inflationary forces. The avoidance of a typical deflationary resolution to this economic long (Kondratieff) wave is pushing the existing monetary system beyond the point of no return. The purchasing power of the developed world’s currencies will have to bear the brunt of the “adjustment”. Preparations for this by the BRICS nations, led by China, are advancing rapidly. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system. A new “basket” currency is likely to replace the dollar as the world’s reserve currency. The “Inflationary Deflation” paradox refers to the coming rise in the price of almost everything in conventional money and simultaneous fall in terms of gold.
- Biggest Banks Face Fed Restoring Barriers in Commodities (BBG)
- SAC to Employees: Cohen Didn't Read Dell Email at Heart of SEC's Case (WSJ)
- Second (and Third) liens are back, and so is 2005: As Banks Retreat, Hedge Funds Smell Profit (WSJ)
- Singapore funds benefit from Asian wealth (FT)
- 2 years later the lies haven't changed one bit - Tepco hit over slow admission of radioactive leak (FT)
- How big tech stays offline on tax (Reuters)
- Hilton Leads Rush to Africa in Fastest Boom (BBG)
- U.S. and UK fine high-speed trader for manipulation (Reuters)
- Key witness takes stand in SEC case against Goldman's Tourre (Reuters)
- Boomer Sex With Dementia Foreshadowed in Nursing Home (BBG)
- Bentley SUV gives £800m boost to UK car industry (FT)
- Detroit ‘Gut Kick’ Poses New Test for Long Suffering City (BBG)
- Florida lawmakers urge overhaul of 'Stand Your Ground' law (Reuters)
- Investors pour huge sums into US equity funds (FT)
- Snowden Standoff Threatens Obama-Putin Moscow Summit (BBG)
- China, U.S. companies' great hope, now a drag (Reuters)
- Morgan Stanley stock traders rebuild burned bridges (Reuters)
- Huawei spied for China, claims ex-CIA head Michael Hayden (FT)
- Gorilla Flipping Homes as Rebound Revives Rapid Trades (BBG)
- BRICS joint action at G20 summit may be wishful thinking (Reuters)
No, last week’s jobs report was not “strong”. It was just another edition of the “born again” jobs scam that has been fueling the illusion of recovery during the entire post-crisis Bernanke Bubble. In short, the US economy is failing and the welfare state safety net is exploding. And that means that the true headwind in front of the allegedly “cheap” stock market is an insuperable fiscal crisis that will bring steadily higher taxes, lower spending and a gale-force of permanent anti-Keynesian austerity in the GDP accounts. And for that reason, the Fed’s strategy of printing money until the jobs market has returned to effective “full employment” is completely lunatic. The bottom-line is that Bernanke is printing money so that Uncle Sam can keep massively borrowing, and thereby fund a simulacrum of job growth in the HES Complex. Call it the Bed Pan Economy. When it finally crashes, Ben Bernanke will be more reviled than Herbert Hoover. And deservedly so.
- China, the single biggest contributor to global growth over the past decade, slowing markedly.
- World trade now flirting with recession.
- OECD industrial production in negative territory YoY.
- Southern Europe showing renewed signs of political tensions as unemployment continues its relentless march higher and tax receipts continue to collapse.
- Short-term interest rates almost everywhere around the world that are unable to go any lower, even as real rates start to creep higher.
- Valuations on most equity markets that are nowhere near distressed (except perhaps for the BRICS?).
- A World MSCI that has now just dipped below its six month moving average.
- A diffusion index of global equity markets that is flashing dark amber.
- Margins in the US at record highs and likely to come under pressure, if only because of the rising dollar.
With the US equity markets only 2 to 3% off their highs, we thought it appropriate to look around the world at where the leveraged equity unwinds so far. There remain a select few nation's equity markets that are positive year-to-date.
We have discussed the idea of a VaR shock (driven by Abe/Kuroda's loss of control) a number of times recently but as Saxo's Steen Jakobsen fears, reality is about to hit as the marginal cost of capital normalizes. The world, so far, has been kept in artificial equilibrium by the way quantitative easing (QE) and fiscal policies bring support and endless liquidity to the 20 percent of the economy that mostly comprises large and already profitable companies and banks with good credit and good political access. The premise for supporting these companies is based on the non-existent wealth effect which unfairly culminates in supporting the haves to the detriment of the have-nots. However, as Jakobsen notes below, things are rapidly changing; the recent increase in yields has happened despite no real improvement in the underlying data. The the next few days are potential major game changers – the bloated VaRs will make people hedge and over hedge, and the normalization process of rising risk premiums and higher real rates (higher yield plus lower inflation) will lead to more selling off of those trades that have "worked so far"... and increase volatility in their own right.
Emerging markets have tanked but some of the reasons for their underperformance will prove overblown, providing opportunities for long-term investors.
Jim Rogers was recently interviewed by GoldMoney and had plenty to say (as usual):
On Bernanke: "He doesn’t want to be around for the consequences of what he’s doing."
On Fiat: "Paper money doesn’t have a very glorious history, but again, nothing imposed by the government has a very long and glorious history."
On Europe's Crisis: "You can postpone it all you want, but the problems just mount."
On Capitalism: "You are not supposed to take money away from the competent people and give it to the incompetent so that the incompetent can compete with the competent people with their own money. That’s not the way capitalism is supposed to work."
We are approaching a critical point (again) in the “battle royal” between the forces of inflation and deflation. Deflationary forces are threatening to overwhelm the reflationary push-back of the world’s central banks - although this is not reflected in most equity markets (especially the US). Open-ended QE was only announced by the Fed last Autumn, but the impact on (market-based) inflation expectations plateaued within months and has started turning down. A decision to taper QE would obviously be negative for equities in the absence of a sufficiently strong offsetting improvement in economic fundamentals – which is difficult to envisage right now.
Not even the most prodigious and reckless money-printing binge can fix it