Capital Markets

The ragged Keynesian excuse that all will be well in Japan once the jump in the consumption tax from 5% to 8% is fully digested is false. Here’s the problem: this is just the beginning of an endless march upwards of Japan’s tax burden to close the yawning fiscal gap left after the current round of tax increases, and to finance its growing retirement colony. There is no possibility that Abenomics will result in “escape velocity” Japan style and that Japan can grow its way out of it enormous fiscal trap. Instead, nominal and real growth will remain pinned to the flatline owing to peak debt, soaring retirements, a shrinking tax base and a tax burden which will rise as far as the eye can see. Call that a Keynesian dystopia. It is a cautionary tale for our times. And Japan, unfortunately, is just patient zero.

The irony of maintaining a veneer of authenticity over a fundamentally inauthentic market is rich: the more the authorities manipulate the market to maintain high valuations and suppress turbulence, the greater the odds of a collapse of trust as inauthentic markets cannot self-correct or discover the price of assets, capital and risk. Once risk has been effectively hidden by perception management, participants lack the essential information they need to make informed decisions. And so their decisions will be catastrophically mis-informed. This is how declines morph into crashes.

Suppresses true money velocity concealing real inflation risk to the economy

From Ukraine to Gaza, geopolitical risks are weighing heavily on investors’ minds. But there are plenty more out there that may not be getting headlines.

Phantom wealth cannot possibly fund unprecedented retirement and healthcare promises. Only real wealth can do that, and central bank liquidity and the asset bubbles it inflates are not real wealth.

With record rental expenses already forcing millions of Americans to have far less disposable income for everything else once the monthly bill for the roof above one's head is paid, here is a breakdown of 25 selected US metropolitan areas, ranked from most to least expensive, how much it costs to rent a two-bedroom apartment (one can only assume the $1,440 price listed for New York is based on some non-GAAP, magical numbers that exclude reality).

In what is certainly a historic, and quite stunning, market first, not to mention prima facie evidence that Janet Yellen was right about the biotech (and not only) bubble, last week the equity markets experienced something that has not happened in decades: a biotech firm went public, traded for six days, only to announce Friday that it would void its IPO and won't issue shares after all, thanks to a key investor's failure to follow through on a commitment to buy stock. In other words, days after going public, yet another darling of the momo bubble mania du jour, decided to undo everything, and went back to being private (and soon: bankrupt).

Huh?

If you are getting a strong sense of déjà vu from current news flow, well, join the club.  Everything feels so… familiar.  And not necessarily in a good way.  When we hear phrases like “Bubble markets”, “M&A cycle”, “historically low yields”, and “retail investor buying”, our minds automatically flash back to prior periods of history when those phrases last dominated the headlines. It isn’t hard to come up with a “Top 10” list of phrases with strong historical - and emotional - antecedents.  So, today we did just that. Fair warning, however: just because a tune sounds familiar doesn’t mean you actually know the song. It could just be what the kids today call a “Sample” – a snippet of a song put in another song. Yep, what we’ve got here is something out of hip hop, not rock.  Don’t especially like rap?  Too bad, homey.

Want to read a really terrifying article? Take a look at this August 6th Op-Ed piece in the FT by Draghi’s former colleague, Lorenzo Bini Smaghi: “The ECB Must Move to Counteract Market Turbulence”. Are you kidding me? This is what we have come to … that the proper role of a central bank is to counteract “market turbulence” before it happens? I’d laugh, but then I remember that Yellen means exactly the same thing when she refers to “macroprudential policy”, and I want to cry.

Are the crafty casino courpiers finally cashing out their cronies' comped chips at the crooked capitlaism craps tables?

• Russia bans all U.S. food, EU fruit and vegetables in sanctions response (Reuters)
• Snowden receives three-year Russian residence permit (Reuters)
• Headline of the day: Europe's Recovery Menaced by Putin as Ukraine Crisis Bites (BBG)
• Americans worry that illegal migrants threaten way of life, economy (Reuters)
• Almost 90% of Uninsured Won't Pay Penalty Under the Affordable Care Act in 2016 (WSJ)
• Germany’s Bond Advance Sends 2-Year Note Yield Below Zero (BBG)
• Gaza War’s Critics in Crosshairs as Israelis Back Offensive (BBG)
• The 1% May Be Richer Than You Think, Research Shows (BBG)
• Bank of America Near $16 Billion to $17 Billion Settlement (WSJ)
• Deep Water Fracking Next Frontier for Offshore Drilling (BBG)

There isn’t much work out there on exactly how much “House money” gamblers or investors are willing to lose before they know to walk away (or run). Fans of technical analysis know their Fibonacci retracement levels by heart – 24%, 38%, 50%, 62% and 100%. Those are the moves that signal the evaporation of house money confidence as investors sell into a declining market. There isn’t much statistical analysis that any of those percentage moves actually mean anything, but enough traders use these signposts that it makes them a useful construct nonetheless.   The only other guideposts I can think of relate to the magnitude of any near term market decline. One 5% down day is likely more damaging to investor confidence than a drip-drip-drip decline of 5% over a month or two. The old adage “Selling begets selling” feels true enough in markets with a lot of “House money” on the line. After all, you don’t want to have to walk home from the casino after arriving in a new Rolls-Royce. 

Earlier we revealed that one of the key topics of discussion during yesterday's quarterly meeting of the TBAC committee with government workers (including Under Secretary for Domestic Finance Mary Miller, Assistant Secretary for Financial Markets Matthew S. Rutherford, Deputy Assistant Secretary for Federal Finance James G. Clark, and Director of the Office of Debt Management Fred Pietrangeli, and two NY Fed staffers, Nathaniel Wuerffel and Lorie Logan) was whether or not markets had become far too complacent, there was another, even more important topic of discussion than simply the beaten dead horse which is the fate of manipulated stock markets.  The topic: the US Treasury suddenly losing access to capital markets.

For seventy years, one of the critical foundations of American power has been the dollar’s standing as the world’s most important currency. For the last forty years, a pillar of dollar primacy has been the greenback’s dominant role in international energy markets. Today, China is leveraging its rise as an economic power - and as the most important incremental market for hydrocarbon exporters in the Persian Gulf and the former Soviet Union - to circumscribe dollar dominance in global energy, with potentially profound ramifications for America’s strategic position.

Today, everyone believes that market price levels are largely driven by monetary policy and that we are all being played by politicians and central bankers using their words for effect rather than direct communication. No one requires convincing that market price levels are unsupported by real world economic activity. Everyone believes that this will all end badly, and the only real question is when.... There’s absolutely nothing sincere about the public sphere today, in its politics or its economics, and as a result we have lost faith in our public institutions, including public markets. It’s not the first time in the history of the Western world this has happened … the last time was in the 1930’s … and over time, perhaps a very long period of time, a modicum of faith will return. This, too, shall pass... It’s the public markets where faith has been lost, and that’s why the Golden Age of the Central Banker poses existential risks for firms and business strategies based on trading activity within those public markets.