While today's key events were supposed to be the Jackson speeches first by Janet Yellen at 10:00am Eastern and then by Mario Draghi at 2:30 pm, Ukraine quickly managed to steal the spotlight yet again when moments after the first Russian humanitarian aid convoys entered Ukraine allegedly without permission, Kiev first accused Russia of staging a direct invasion, even if moments later it changed its tune and said it had allowed the convoy in to "avoid provocations." In other words, your daily dose of Ukraine disinformation, which initially managed to push futures down some 0.3% before futs regained virtually all losses on the subsequent clarifications. Expect much more conflicting, confusing and very provocative headlines out of Kiev as the local government and the CIA try to get their story straight.
The current occupation of the markets is both "unbelievable in power and grandeur." There is simply no denying the current bull market trend as "silent crowds remain stupefied by its immensity, its endlessness and its splendid perfection." The thought for the day is simply this: "Like the many proud soldiers that occupied Brussels then, two or three years from now, how many investors will be alive to 'tell the tale' of the occupation of the bull market today?" It is within "resigned complacency" that the risks to portfolios are easily dismissed with the conviction of strength and control. Yet, it is also within this illusion that the greatest defeats in history have been delivered.
Something surprising happened in the early days of August: a person was actually held accountable for his mistake. As the WSJ reported previously, "a billion-dollar forecasting error in Walgreen Co.'s Medicare-related business has cost the jobs of two top executives and alarmed big investors." Specifically, at an April board meeting, Chief Financial Officer Wade Miquelon forecast $8.5 billion in fiscal 2016 pharmacy-unit earnings, based partly on contracts to sell drugs under Medicare. This did not pan out as expected and last month, just a few months later, the CFO unexpectedly cut that forecast by $1.1 billion. And then, In early August, the CFO of the nation's largest drugstore chain was gone. He wasn't alone: Walgreen said several days earlier that its pharmacy chief, Kermit Crawford, would retire at year-end.
The Federal Reserve's communications and policies are a form of crazy-making double bind. No wonder the economy and everyone participating in it are beset by various manifestations of mental and physical illness. On the one hand, the Fed insists the economy is expanding and all is well. If this is true, then the Fed should allow interest rates to normalize, i.e. be unleashed from the Fed's financial prison and allowed to rise to whatever the market of borrowers and lenders sets as fair in the current climate. But the Fed also insists that it cannot allow rates to rise. The ultimate Fed crazy-making double-bind is this: you can't live without us, your financial Overlords who keep you safe from recession and the volatility of creative destruction, but you can't be free or prosperous with us in control.
- FTW: Europe Stocks Rise as Data Signals Need for Stimulus (BBG)
- More de-escalation: Dozens die in Ukraine in street battles, Donetsk shelling (Reuters)
- Calm largely holds in Missouri after grand jury opens shooting investigation (Reuters)
- Attorney General Eric Holder Vows Thorough Probe of Ferguson Shooting (WSJ)
- World’s Biggest Wealth Fund Slows Emerging Market Investment (BBG)
- Market Chilly to Argentine Debt Proposal (WSJ)
- Israeli air strike kills three Hamas commanders in Gaza (Reuters)
- Retooled Hamas Bloodies Israel With Help From Hezbollah (BBG)
- Investors Pour Into Vanguard, Eschewing Stock Pickers (WSJ)
- Fed Debates Early Rate Increases (WSJ)
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.
Would Salvador Dali make a better Federal Reserve Chairman than Janet Yellen or Ben Bernanke before her?
Even Hellicopter Ben would have balanced remarks. However, Janet Yellen has taken dovishness to an all-time high or low dpending on your perspective.
There is much hope pinned on continuing economic recovery in the United States despite a deterioration of the global economy virtually everywhere else. While it was not surprising to see a bounce back in activity after a contractionary first quarter, there are several economic data points that suggest that sustainability of the bounce is unlikely. Expectations are very likely well ahead of reality at the current time. This increases the risk of disappointment in the months and quarters ahead which could be a negative for the markets.
The Wall Street Journal's Jon Hilsenrath unleashed an instantaneous reaction to today's FOMC minutes and the message is clear - markets are much less uncertain than the Fed about the timing (sooner rather than later) of the first rate-hike. The minutes of the meeting, Hilsy notes, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices. The minutes appeared to reflect a slightly more aggressive stance than Ms. Yellen's testimony.
"Today’s environment, however, is quite distinct, as seen in the chart below, where we lay out the GMO seven-year forecasts in a volatility (an imperfect shorthand for risk) versus return format for the traditional asset classes, or betas. This beta desert is so challenging because not only are there no asset classes that we believe are priced to deliver 5% real return (the red line), there is also no safe place to hide and wait (the green circle)." - GMO
The arrogance, hubris and contempt for morality displayed by the ruling class is breathtaking to behold. They think they are untouchable and impervious to norms followed by the rest of society. They may have won the opening battle, but will lose the war. Discontent among the masses grows by the day. The critical thinking citizens are growing restless and angry. They are beginning to grasp the true enemy. The system has been captured by a few malevolent men. When the stock, bond and housing bubbles all implode simultaneously, all hell will break loose in this country. It will make Ferguson, Missouri look like a walk in the park.
The world’s central bankers have given companies the urge to merge. Merger and Acquisition (M&A) activity has already reached $2.2 trillion this year according to Thomson Reuters Deals Intelligence, up 70% from this time a year ago. The deals are big, with eight acquisitions, each over $5 billion, being announced in just a single week in July. However CEO buying sprees do not create new jobs and new products that make our lives better, but are instead just wasteful malinvestments that destroy capital. The cost of capital is integral to making these assumptions. The lower the assumed interest rate or cost of capital, the higher the price for the acquisition that the models will justify. Once interest rates go up, these valuation models will be blown to pieces.
Nobody really believes the official narrative that the "recovery" is powering the remarkable strength of U.S. stocks, bonds and real estate. The real Main Street economy is quite obviously struggling, outside the energy and Federal government sectors, and so many see the Federal Reserve's free money for financiers (a.k.a. quantitative easing) bond and mortgage-buying programs as the real reason bond yields have declined and stocks have soared. This leads us to wonder if capital inflows into the U.S. aren't a largely overlooked driver of rising U.S. markets.
Good thing the Federal Reserve isn`t worried about inflation, another 2% rise is just noise. But when the Fed does start worrying about inflation, not only is it too late, it is 1970s too late!