By my count we are now in our fourth “Recovery Summer.” The recession was officially (and mistakenly) declared over in June 09. Yet, no data series in economics not influenced drastically by liquidity and a zero interest rate policy (e.g., stock prices and home prices) supports the claim. Recovery advocates point to the stock market as a barometer of how well the economy is doing. A key takeaway is that the stock market misled people during the 1930s and may be doing the same thing today. Those who want to argue against this position will declare the 1930s an unfair comparison because it was a Great Depression. Just what makes them think what we are in today is not the same thing, although not yet as far advanced. Given the trillions of dollars wasted to hide the true condition of the economy, that is not an unreasonable possibility. This liquidity hides the true nature of the economy (also falsely drives up financial asset prices) and creates even bigger distortions in the real economy.
On one hand we have bad Hilsenrath sending mixed messages saying the Fed may taper sooner (with good Hilsenrath chiming in days later, adding it may be later after all), depending on whether HY bonds hit 4% YTM by EOD or mid next week at the latest. On the other, even resolute Fed doves are whispering that a tapering may occur as soon the summer, so in a few months, and halt QE by year end. Bottom line - confusion. So who better to arbitrate than the firm that runs it all, Goldman Sachs, and its chief economist Jan Hatzius, who issues the following Q&A on "tapering." His view: "not yet." Then again, Goldman is the consummate (ab)user of dodecatuple reverse psychology, so if Goldman says "all clear" the natural response should be just as clear.
The promises made to the 76 million baby Boomers cannot be met. It's really very simple: promises made when the economy was growing by 4% a year and the next generation was roughly double the size of the generation entering retirement cannot be fulfilled in an economy growing 1.5% a year (and only growing at all as the result of massive expansions of public and private debt) in which the generation after the cohort entering retirement is significantly smaller. We desperately need an adult discussion focused on reality rather than resentment. The solution will require dismantling open-ended, everyone-deserves-everything Medicare, which will bankrupt the nation itself. The solution is currently "impossible". What nobody dares say is that if the 76 million Boomers press their claims to the point the nation is bankrupted, then the next generations (X and Y) will have to wrest political power from the retirees, not for their own sake but for the sake of the nation and for the generations behind them.
- PBOC Says China Shouldn’t Be ’Blindly Optimistic’ on Inflation (BBG)
- Foreigners Buying Half of London New Homes Prop Up Building (BBG) - first they come for the foreign deposits, then for the real assets...
- Investors Rediscovering Margin Debt (WSJ) - well, yes: it is at record highs
- China issues new rules targeting wealth management fund pools (RTRS)
- Navy $37 Billion Ships Seen Unsuitable Have 2-Year Window (BBG)
- New York may have to drop claims against BofA over Merrill (RTRS)
- FBI Rejects Boston Police Stance in Spat Over Terror Data (BBG)
- In eastern Syria oil smugglers benefit from chaos (RTRS)
- Microsoft prepares U-turn on Windows 8 (FT), Microsoft admits failure on Windows 8 (MW), After Bumpy Start, Microsoft Rethinks Windows 8 (NYT)
- China reports four more bird flu deaths, toll rises to 31 (Reuters)
- Republicans shift stance on US budget (FT)
- NYC Tallest Condo Corridor Gets New Entrant With Steinway (BBG)
- U.S. Says China's Government, Military Used Cyberespionage (WSJ)
- China rejects Pentagon charges of military espionage (Reuters)
- Bank of China Cuts Off North Korean Bank (WSJ)
- Libya defense minister quits over siege of ministries by gunmen (Reuters)
- London Recruiter Says City Job Vacancies Rose 19% (BBG)
- Colleges Cut Prices by Providing More Financial Aid (WSJ) or, said otherwise, loans
- Jeweler agrees to plead guilty in KPMG insider-trading case (LA Times)
The state of Arizona may become the second state to use gold and silver coins as legal tender. Last week, Arizona lawmakers passed a bill that makes precious metals legal tender. Arizona is the second state after Utah to allow gold coins created by the U.S. Mint and private mints to be used as currency. Utah has had the law on the books for the past 2 years and is working on a system for using the precious metals as currency. The Arizona Senate Bill 1439 would allow the holder of gold or silver coins or bullion to pay a debt. However, the coins must be issued by the U.S. government or approved by a court, like an American Eagle Coin. Oddly the government does not require that persons or business must use or accept gold or silver as legal tender in contravention of the U.S. Constitution. The sponsor of the bill, Republican Sen. Chester Crandell, would need a final state Senate vote after approval by the House, and if passed the law would not take effect until 2014. Crandell said, "The whole thing came from constituents".
One of the simplest, most overused and popular assertions is that claim that stocks must rise because interest rates are so low. In fact, you cannot get through an hour of financial television without hearing someone discuss the premise of the Fed Model which is earnings yield versus bond yields. The idea here, once formalized as the "Fed Model," is that stocks' "earnings yield" (reported or forecast operating earnings for the S&P 500, divided by the index level) should tend to track the Treasury yield in some fashion. This simply doesn't hold up in theory or practice.
There is no hope whatsoever of so-called U.S. "energy indepedence" unless three things happen. First, environmental rules have to be wound back to 1970 standards -- in other words, disband the EPA and make civil plaintiffs show actual harm, not just hypothetical harm because someone goofed on a sheaf of mandated paperwork. Second, stop wasting taxpayer money on nonsense like $25 per gallon biofuel. Third and most urgently, stop subsidizing Wall Street. Let the market decide what interest rates make sense, rewarding companies who can find and produce oil, instead of gorging themselves sick on artificially cheap junk bonds that money-losing shale swindlers will never pay off.
Debt-serfdom and the dominance of Financial Power are two sides of the same coin. Let's be clear about three things: 1. Too Big to Fail financialization is the metastasizing cancer that has crippled democracy and capitalism; 2. Financialization feeds on expanding debt and cannot survive without it; and 3. Debt is serfdom. Debt is the mechanism of the Financial Powers' dominance and the chains of our serfdom. Eliminate debt and you eliminate the foundation of banks' power and the financial bondage of serfdom. Though it would dearly love to, the State cannot force anyone to take on debt except as taxpayers. We do not have to remain debt-serfs, nor accept our servitude as unavoidable or fated. Debt = serfdom. There is another way to live, frugally, with only short-term debts that are paid off in a few short years. We either accept the consumerist-narcissist debt-serf programming or reject it. We are neither victims nor bystanders. The choice is ours.
Despite the all-knowing Alan Greenspan confirming there is no irrational exuberance currently, Oaktree Capital's Howard Marks is less convinced. Though he is not bearish, he lays out rather succinctly the current pros and cons for equities - based on the various 'valuation' arguments, discusses the folly of the equity risk premia, and highlights the dangers of extrapolation and what history can teach us... "appreciation at a rate in excess of the cash flow growth accelerates into the present some appreciation that otherwise might have happened in the future... it isn't just a windfall but also a warning sign."
Overview of the drivers of the fx market, a discussion of the price action and a review of the latest Commitment of Traders report from the futures market. Contrary to ideas that QE3+ is the dominant force and dollar negative, the net speculative position is now long dollars against all the major currency futures but the Australian dollar and Mexican peso. The dollar's gains though appear to be a function of events outside the US.
Money – we all want it, but few of us are willing to sacrifice to get it. Those that have it generally don't understand it, and those that don't have it come up with excuses why they can't get it. If this sounds confusing – it is. For all that we have accomplished in the United States in the last 200+ years we have failed miserably at teaching our children the basics of money management. We are not talking about stock and bond portfolios but rather the basics of spending less than you make, understanding of credit, and how to balance a check a book. We are inundated daily with credit card commercials that show how great life can be – just charge it. We are enticed to buy things that we don't really need though the use of zero percent financing – but only while it lasts. We are motivated to consume anything and everything in pursuit of the American dream but no one ever talks about the consequences of our actions. The secret, of course, is the true road to wealth and happiness. It is irrefutable, undeniable and absolutely achievable - spend less than you make.
- Tunisian opposition politician shot dead, protests erupt (Reuters)
- China says extremely concerned after latest North Korea threats (Reuters)
- Postal Service to cut Saturday mail to trim costs (AP)
- Debt Rise Colors Budget Talks (WSJ)
- Obama proposes short-term budget fix, Republicans swiftly object (Reuters)
- S&P Analyst Joked of Bringing Down the House Before Crash (BBG)
- Dell’s Bigger Challenge Ahead in Turnaround After Buyout (BBG)
- Some of the Mark Carney Gloss Is Coming Off (WSJ)
- Japan Official Says BOJ Tools Sufficient as Shake-Up Looms (BBG)
- S&P Lawsuit Undermined by SEC Rules That Impede Competition (BBG)
- Heavy Clashes Erupt in Syrian Capital (WSJ)
While we can only hope the following screed posted in an otherwise serious BusinessWeek, by David Kemper, CEO of Commerce Bankshare, and more importantly, a former president of the Federal Advisory Council of the Federal Reserve and thus indicative of the kind of "advice" the Fed receives, is a joke we have a very nagging feeling that the text below is actually serious. Which is why instead of Friday humor, we have decided to err on the side of caution and call this segment Friday tragicomedy. Because with a statement such as the following: "Why not expand the Fed balance sheet exponentially, from its current $3 trillion to $33 trillion... Would $30 trillion in extra buying power be inflationary when our entire current GDP is only about $15 trillion? Maybe, maybe not—but we need a game-changer here. First let’s celebrate the Fed’s record profits and its contribution to reducing our deficit. Then let’s seize the moment to do something truly grand: eliminate that stubborn deficit. We have the tools, and I, for one, say let’s give it a try."... it shows that the idiotic trillion dollar coin, Sheila Bair's farcical suggestion to let every American borrow $10 million from the Fed at zero rates, or even our suggestion from a year ago that the government build a Death Star, may appear as sheer genius in comparison to what else the Fed may be considering, and implement, before all this is said and done.
The Keynesian belief that the government can print/ borrow and spend enough money to trigger self-sustaining prosperity is a nonsensical, magical-thinking Cargo Cult. The following charts show why it will continue to fail, with eventually catastrophic results: the returns on this unprecedented borrow-spend policy are diminishing to near-zero or negative. As long as the interest rate on debt is low, the path of least resistance is to keep borrowing to support politically untouchable fiefdoms, cartels and constituencies. Eventually, the cost of servicing the debt overwhelms the diminishing returns on the debt-based spending.