Today, the world economy is in uncharted territory. Never before has the developed world carried this much debt. Never before have the central banks of those same countries expanded their balance sheets so much. Never before has so much sovereign debt been outright monetized. Never before have major financial institutions been officially designated as “too big to fail” and thereby been granted special license to assume gigantic risks. Dr. Lacy Hunt, economist and current executive vice president of Hoisington Investment Management Company, expects the macroeconomic situation to get worse from here...
The zombification of corporate America is nowehere more evident than the yield-starved demand that has enabled companies with the lowest of the low credit ratings to raise debt capital and stay alive far beyond their 'natural' lifespan. As WSJ reports, investors are gobbling up some of the riskiest debt from junk-rated European companies at the fastest pace in years. The riskiest tranche of that debt - so-called second-lien, or junior, loans - amounts to $3.3 billion, almost double the amount raised at the same stage last year and the most over the same period since 2007. The reason is simple - Central Banks - "If you have more demand than supply then you end up with a loosening of terms and potentially more leverage and more aggressive structures." This is 'mal-investment' writ large, and at least as bad as during the 2007 bubble.
India, Pakistan Intensify Shooting Across Border; Iran Downs Israel Drone; ISIS Seizes Military AirportSubmitted by Tyler Durden on 08/24/2014 12:07 -0400
Since in the New Normal no geopolitical events appear to have any adverse impact on risk and asset prices (because the central banks are always there to protect investors should the market "plunge" by say 5%) with general newsflow completely irrelevant on what has been a straight line up in the S&P since the announcement of QE4 in December 2012, one might as well see how much further geopolitical events can be pushed further before it all crashes. In other words, time for this weekend's geopolitical update which covers everything from India, Pakistan, Iran, Israel, Iraq, Syria and Qatar.
Janet Yellen has essentially confirmed QE’s demise; good riddance. Unfortunately, I don’t think that is the final end of QE in America, just as it hasn’t been the end time after time in Japan (and perhaps now Europe treading down the same ill-received road). The secular stagnation theory, that we think has been fully absorbed in certainly Yellen’s FOMC, sees little gain from it because, as they assume, the lackluster economy is due to this mysterious decline in the “natural rate of interest.” Therefore QE in the fourth iteration accomplishes far less toward that goal, especially with diminishing impacts on expectations in the real economy, other than create bubbles of activity (“reach for yield”) that always end badly. What Krugman and Summers call for is a massive bubble of biblical proportions that “shocks” the economy out of this mysterious rut, to “push inflation substantially higher, and keep it there.” In other words, Abenomics in America. Japanification is becoming universal, and the more these appeals to generic activity and waste continue, the tighter its “mysterious” grip.
Another day, another brilliant scheme from the think-tank that is the G-20: prevent systemic collapse from TBTF banks loaded up with record amounts of debt by forcing them to... issue more debt.
If you’re a girl and you’re old and you’re grey and you’re the size of a hobbit, who’s going to get angry at you? If your predecessor had all the qualities anyone could look for in a garden gnome, and his predecessor was known mainly as a forward drooling incoherent oracle, how bad could it get? Think they select Fed heads them on purpose for how well they would fit into the Shire? Janet Yellen has a serious problem: the story no longer fits.
It is clearly not in the interests of the long-standing members of the EU to escalate a 'sanctions and financial conflict' with Russia. This is why politicians are walking on eggshells, paying lip-service to America and the scared Eastern fringe members of NATO while hoping this goes no further. So long as this is the case it is clear that NATO members are powerless to stop Russia from wresting control of all or parts of Ukraine from the government in Kiev. Putin knows this; unfortunately it is not clear to us that the American government does. All in all it seems likely that after a period of slow-burn as Putin dictates the pace of developments, the political situation in Ukraine will deteriorate with some unhelpful nudges from Russia.
Russia Releases Video Of Massive Army Drill To "Contain Armed Conflict In Imaginary State"; Schedules 2 MoreSubmitted by Tyler Durden on 08/22/2014 15:29 -0400
Two weeks ago today, on Friday, August 8, the "market" seemingly desperate for any excuse to soar, did just that when Russia, tongue-in-cheek, announced that a Russian military drill, which everyone knew in advance would end that day, and which "worried the US department of state" finished. So by that logic the announcement of a new, and even more massive, military drill by Russia should send stocks crashing, right? We are joking of course: there is no news in this world that could possibly send stocks lower as good news is great but bad news only means even more intervention of various central banks, however Russia did indeedannounce that it will take part in counter- terrorism exercise called Peace Mission in China. All this is happening as Russia is currently taking part in a third exercise, called Interaction-2014, located in Kazakhstan with members of the Collective Security Treaty Organization. The purpose of this particular drill: "seek to contain armed conflict in imaginary state."
With Yellen's speech a bit of a letdown for the doves - she did not go full-dovish - markets anxiously await Mario Draghi to promise whetever for ever and ever... While financial markets don’t expect bombshells, his speech is an opportunity to underscore that ECB policy will stay looser for longer than that of the Fed and the Bank of England.
DRAGHI SAYS HE'S 'CONFIDENT' JUNE STIMULUS WILL BOOST DEMAND, SEES 'REAL RISK' MONETARY POLICY LOSES EFFECTIVENESS
While the Federal Reserve presents itself as free to do whatever it pleases whenever it pleases, the reality is the Fed's own policies are constraining its choices. The Fed is being forced to end its bond-buying, cutting off the "free money for financiers" that has sustained a frothy stock market.
Out of the gate - based on the fact the word "slack" was present and the word "bubble" was not, stocks ramped higher as J-Yell's J-Hole speech hit. Bond yields surged (led by 5Y) and the USDollar also surged (as gold shrugged). However, once the machines were done, humans reacted to the fact that this was not the "full dovish" speech that was 'priced in' and have started to sell stocks back... but then again - we always have Draghi later to save Friday...
Anytime there are negative or even close to negative real rates for bonds that is a sign that central banks need to change policy.
With the FOMC Minutes in the books, the only remaining major event for the week is the Jackson Hole conference, where Yellen is now expected to talk back any Hawkish aftertaste left from the Minutes, and which starts today but no speeches are due until tomorrow. And while the Minutes were generally seen as hawkish, stocks continue to levitate, blissfully oblivious what tighter monetary conditions would mean to an asset bubble, which according to many, is now the biggest in history. And speaking of equities, US futures climbed to a fresh record high overnight on just the right mix of bad news.
When a tin-foil-hat-wearing blog full of digital dickweeds suggest the dollar's reserve currency status is at best diminishing, it is fobbed off as yet another conspiracy theory (yet to be proved conspiracy fact) too horrible to imagine for the status quo huggers. But when the VP of Research at the New York Fed asks "Could the dollar lose its status as the key international currency for international trade and international financial transactions," and further is unable to say why not, it is perhaps worth considering the principal contributing factors she warns of.
The algos and chart traders are making another run at 2000 on the S&P 500, attempting to convince the wary investor one more time that buying on the dips is a no brainer. And in that proposition they are, ironically, correct. To buy this utterly manipulated market at these nosebleed valuation levels is about as brainless of an undertaking as is imaginable.