The minimum wage is not what is commonly referred, as is being proven again as parts of the US experiment directly with this boundary. In New York, fast food workers have been given a $15 per hour minimum wage which is being celebrated by the same fast food workers who will bear the brunt of the experimentation. Some of them will be happy with the results, but there will be clear losers – the full wrath of redistribution is usually unseen which is why it persists.
Just as Japan thought they could go back to pre-Plaza Accord growth rates by holding on to the old ways in the 1990s, the Chinese will expect the growth miracle to return in 2016 with the “right” policies. It will not. It is all a mirage though. Just as in Japan, the Chinese will not allow the market process to do its magic to get the economy back on a stable footing. Draconian measures to stop the recent stock market rout are a clear testimony of that. In other words, the Chinese economy will resemble that of Japan, and it will do so very soon, if it is not already there. China is heading straight into a zero growth environment, and will be mired there for years to come.
With almost everything turning lower this week under “dollar” pressure, it is imperative to keep in mind the apex asset class. In 2007, it was the ABX indices and various mortgage related structures that signified the how far along everything was; in this cycle it is clearly corporate credit. The disarray starts in the riskiest pieces and then moves inward and eventually, if left unchecked, eroding too much underneath with which to support what was once believed perfectly safe. Once there is no place to hide, the turn really begins.
The action in gold in 2013 was a warning about the “dollar”, a warning that went completely unheeded yet has been largely fulfilled. Again, 2013 provides a guide as to why gold prices may be declining in sharp moves, especially right at the open or in weaker trading hours, and it has very little to do with interest rates apart from fixed income suggesting the same factors about the “dollar.” Whether it is growing unease about the global economic picture or the “sudden” recurrence of financial irregularity almost wherever you wish to gaze, the “dollar” is once more wreaking havoc. This isn’t controversial at all, but somehow economists can miss that gold is global and universal collateral and when the eurodollar system is stressed it becomes activated in that manner.
Having now passed the anniversary of the “rising dollar”, it is interesting to see the related and continued effects on the stock bubble(s). As should be obvious by now, stock buybacks, funded via corporate bonds and loosely categorized C&I loans, are responsible for the post-QE3 nearly uninterrupted rise. Repurchases are forming a separate “liquidity” conduit, indirect leverage if you will, which has already started to fray. Various broader “market” indices have diverged, starting with the Russell 2000 in early 2014 (with the economic slowdown that was supposed to be an anomaly of weather). At the very least it might imply that the central bank paradigm that lasted since the middle of 2012 has greatly eroded or even ended.
When Warren Buffet put $5 billion in Berkshire Hathaway funds into Goldman Sachs the week after Lehman failed, amidst total turmoil and panic, it appeared from the outside a high risk bet. Buffet had long tried to portray himself as a folksy engine of traditional stability, investing only in things he could understand, so jumping into a wholesale run of chained liabilities may have seemed more than slightly out of character. We have no particular issue with Buffet making those investments, only the pretense of intentional mysticism that surrounds them. The reason the criticism of crony-capitalism sticks is because this was not Buffet's first intervention to "save" a famed institution on Wall Street. If Buffet's convention is to stick with "things you know" then he has been right there through the whole of the full-scale wholesale/eurodollar revolution.
Nobody apparently learned much from the whole bubble-bust affair as banks and financial firms are at it again, this time in corporate debt. The artificial suppression of default, in no small part to perceptions of those bank reserves under QE (just like perceptions of balance sheet capacity pre-crisis), has turned junk debt into the vehicle of choice for yet another cycle of “reach for yield.” In the past two bubble cycles, we see how monetary policy creates the conditions for them but also in parallel for their disorderly closure. It isn’t money that the FOMC directs but rather unrealistic, to the extreme, expectations and extrapolations. Once those become encoded in financial equations, the illusion becomes real supply.
What investors will focus on in the week ahead
A look at the psycholgoy of traders as reflected in the price action ahead the new week which promises to be eventful.
Trillions upon trillions in “stimulus” and the FOMC is left, pathetically, fighting for the distinction of “it’s not as bad as it looks.” That would seem to make this the most costly economic age ever conceived, with global implications that are just now starting to be felt as whatever faith was leftover from 2008, wrong or right, wears off all over the world. That is a highly combustible deficiency, since the longer the global economy remains disorientated the more likely it is to experience not just recession but, since this is all still so leveraged (even more poorly this time), something potentially worse.
Stocks may be ignoring the 'dollar' and liquidity more broadly (at least as far as repurchases are concerned) but the continued stress in the eurodollar world has had an accumulating effect in some places. Primarily that has been shown in the once-thriving junk space, including more illiquid “products” like leveraged loans... By and large, there seems to be renewed concerns about liquidity, economy or both.
The last time the Fed tried to exit a period of massive balance sheet expansion coupled with ZIRP - back in 1937 - its strategy completely failed. The Fed tightening in H1’37 was followed in H2’37 by a severe recession and a 49% collapse in the Dow Jones. This is the ghost of 1937 and it is about to make a repeat appearance.
The serial bubbles of the 2000’s are nothing more than what was wrought of the 1920’s, in general. The monetary character of both is not coincidence, as the failures that bookend each of these ages induces the transformation: from monetary to fiscal and back to monetary again. That looks like progress and accountability, but in each it only leads to more extreme measures (relative to the last) to still achieve what Robert Owen and Karl Marx conceived more than a century and a half ago. That leads us to 2015 and what is certainly the ragged end of the eurodollar standard. The third socialist age was undone by August 2007, but that did not stop its proprietors of “eurodollar socialism” under the name “investor capitalism” from trying to rebuild and restore it to full capacity. The groundwork has already been laid, and it is exactly what you would expect given the history since 1907. There are no widespread details about a return to capitalism and sound money practices, only how to overcome the third installation of that timeless barrier thrown down in the collapse of each of the asset bubbles so far – value.
We should not even want to rebuild the world as it was in the decade of the 2000’s because it was so unbelievably unstable, a fact revealed persistently in the nearly eight years since that peak. Economists and central bankers treated the Panic of 2008 and the Great Recession as if it were a temporary interruption in an otherwise healthy system, a cyclical problem that over time heals on its own. Most of them still, to this day, hold the same view and the world’s economy and financial system is paying the costs of doing so. The eurodollar economy is falling apart and no amount of orthodoxy can reverse it because the eurodollar economy is orthodoxy.
The Fed sees no risks of bubble trouble because they are looking at it all from the 2008 perspective. That is completely wrong-headed; if there is a “next one” it will have nothing to do with subprime mortgages, or even mortgages and real estate. Everyone seems to simply assume that the subprime problem ended in 2008, if only by crash. That is true but only of mortgages. Deleveraging is myth as debt has still expanded, and greatly, just not in the same exact places. There are certainly auto and student loans that have exploded exponentially, especially in subprime categories, but if there is another credit bubble now, the third, it is undoubtedly corporate debt.