With 40% of the portfolio in cash and having returned $4 billion to clients at year-end, Seth Klarman's Baupost Group has "drawn the line in the sand" as they reflect on the diminished opportunities in the so-called "Truman Show" market we see today. In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, Klarman notes, the stock market, heading into 2014, resembles a Rorschach test - "what investors see in the inkblots says considerably more about them than it does about the market." From "born bulls" to "worry genes" and from Bitcoin to flash-mob-speculation, "there is a growing gap between the financial markets and the real economy...and the overall picture is one of growing risk and inadequate potential return almost everywhere one looks... as every 'Truman' under Bernanke’s dome knows the environment is phony."
Everyone agrees that the winter just now winding down (hopefully) has been brutal for most Americans. And while it's easy to conclude that the Polar Vortex has been responsible for an excess of school shutdowns and ice related traffic snarls, it's much harder to conclude that it's responsible for the economic vortex that appears to have swallowed the American economy over the past three months. But this hasn't stopped economists, Fed officials, and media analysts from making this unequivocal assertion. In reality the weather is not what's ailing us. It's just the latest straw being grasped at by those who believe that the phony recovery engineered by the Fed is real and lasting. The April thaw is not far off. Unfortunately the economy is likely to stay frozen for some time to come.
Some readers may remember the price of Coca Cola being just 5c back in the early 1950s (for a 6.5oz glass)... meaning the US dollar has lost 93.8% against Coca Cola over the past six decades. Now, we are taught from the time we are children that "a little inflation is good..." And when central bankers tell us they’re targeting an inflation rate of 2% to 3%, that certainly doesn’t seem so bad. 2% is practically just a rounding error. But bear in mind a few things...
As Bill Clinton once famously stated; "What is....is" and while the current market "IS" within a bullish trend currently, it doesn't mean that this will always be the case. This is why, as investors, we must modify Clinton's line to: "What is...is...until it isn't." That thought is the foundation of this weekend's "Things To Ponder." In order to recognize when market dynamics have changed for the worse, we must be aware of the risks that are currently mounting.
Following last week's discovery that Mohamed El-Erian was "sick of cleaning up [Bill Gross's] shit" as tensions soared at PIMCO, the "bond king" has struck back blasting to Reuters that he's "so sick of Mohamed trying to undermine me," claiming El-Erian wrote the damaging WSJ article. Furthermore, the somewhat paranoid-sounding Gross indicated that he had been monitoring El-Erian's phone calls but when questioned by Reuters for evidence of El-Erian's undermining, Gross responded "you're on his side. Great, he's got you, too, wrapped around his charming right finger." As one analyst noted, "I've never seen Bill and Pimco scrutinized like this before... a couple of high-profile stumbles and mediocre showings, coupled with some outflows clearly has some investors on edge."
Core inflation, which excludes the effect of food and energy prices and is how every self-respecting economist measures price increases, is up 8.75% over the past five years. However, as ConvergEx's Nick Colas notes, this is a poor indicator for the true cost of living for many Americans. Having scrubbed the data, Colas has found the top 10 items that appreciated the most from 2008 to 2013 and the 10 items that became substantially less expensive, according to the government's Consumer Price Index (CPI). The data is deceiving though, as the CPI's "hedonic quality adjustment" distorts the amount of money people actually spend. Even more importantly, Colas warns, things that have a relatively low weighting in the CPI and that people use selectively – such as healthcare and education – don't have a big impact on the core number, but represent considerable expenses for many Americans. Thus we must use caution when using one figure to make policy decisions for an entire nation, and consider what happens to inflationary expectations if and when the still-sluggish economic recovery finally finds second gear.
Is the U.S. economy steamrolling toward another recession? Will 2014 turn out to be a major "turning point" when we look back on it? Before we get to the evidence, it is important to note that there are many economists that believe that the United States never actually got out of the last recession. In fact, that would fit with the daily reality of tens of millions of Americans that are deeply suffering in this harsh economic environment. But no matter whether we are in a "recession" at the moment or not, there are an increasing number of indications that we are rapidly plunging into another major economic slowdown. The following are the top 12 signs that the U.S. economy is heading toward another recession...
Though many may reckon the U.S. government (and its Deep State) are not so much incompetent as merely evil, we suggest incompetence sows the seeds of evil consequences. Why is our government so incompetent? Short answer: because incompetence has been fully institutionalized in every branch, every agency and every nook and cranny of the state.
Below is the photo that reveals why US and EU bankers despise Russian President Putin so much
Many observers have focused on the relative paucity of the West's diplomatic and military options in Ukraine. Others focus on Russia's sources of leverage: cutting off natural gas to western Ukraine and Europe and/or dumping its reserves of U.S. dollars. All those focusing on the West's lack of leverage are forgetting that the Empire retains multiple way of striking back. For example, bringing the costs of misadventure home to Russia's politically influential 1/10th of 1%.
As the markets push once again into record territory the question of valuations becomes ever more important. While valuations are a poor timing tool in the short term for investors, in the long run valuation levels have everything to do with future returns. The current levels of profits, as a share of GDP, are at record levels. This is interesting because corporate profits should be a reflection of the underlying economic strength. However, in recent years, due to financial engineering, wage and employment suppression and increase in productivity, corporate profits have become extremely deviated. This deviation begs the question of sustainability. As we know from repeatedly from history, extrapolated projections rarely happen. Could this time be different? Sure. However, believing that historical tendencies have evolved into a new paradigm will likely have the same results as playing leapfrog with a Unicorn. There is mounting evidence, from valuations being paid in M&A deals, junk bond yields, margin debt and price extensions from long term means, "irrational exuberance" is once again returning to the financial markets.
You hear that old saw that "the market is not the economy," a lot these days, and for good reason. As ConvergEx's Nick Colas notes, the S&P 500 breaks to record highs - but U.S. labor markets remain sluggish; investor portfolios do well - but over 47 million Americans (more than 15% of the population) are still in U.S. food stamp program – the same as August 2012. The important question now is: "Is the market TOO different from the economy?"
The speculative excesses and political power of Wall Street pose a strategic threat to the Deep State, and as a result a showdown between the Deep State and the surface machinery of governance that has been captured by Wall Street is looming. Put another way: we've reached Peak Wall Street and it's all downhill from here. This crisis is simple to summarize: the paper claims on wealth so far exceed actual wealth that something's gotta give. Simply put, the vast majority of these claims will have to be zeroed out, i.e. these phantom-claim "assets" will be voided and declared worthless. This leads to the key question: who will the Deep State throw under the bus to preserve itself and the nation-state?
The technicals break with the news!
- Russian markets hit as Putin tightens grip on Crimea (Reuters)
- Ukraine Sees More Russian Incursions as Standoff Worsens (BBG)
- Ukraine Crisis Roils Global Markets (WSJ)
- Cold War Ghosts Haunt East Europe in Moves for Crimea (BBG)
- How Moscow Orchestrated Events in Crimea (WSJ)
- Russia Gas Threat Shows Putin Using Pipes to Press Ukraine (BBG)
- Euro-zone PMI slowed less sharply than estimated (MW)
- Two top Microsoft execs to leave in reshuffle (Reuters)
- Soaring Luxury-Goods Prices Test Wealthy's Will to Pay (WSJ)
- IQ-Boosting Drugs Aim to Help Down Syndrome Kids Learn (BBG)