The mainstream media staple 'common wisdom' within the financial markets is that when the Federal Reserve "tapers," or eventually ceases, its current bond buying program that interest rates will begin to rise. However, there are three primary issues which should be considered that fail to support this widely held belief. The Federal Reserve has gotten itself trapped into creating an asset bubble in the equity markets because any reversal of policy leads to severely negative economic consequences. With the current economic recovery cycle already very extended in historical terms, along with the financial markets, it is unlikely that we have just begun a growth cycle that will allow the Federal Reserve to extract its support. The reality is quite the opposite, and the next asset rotation will not be from bonds to stocks; but just the opposite.
The correlation between stock prices and margin debt continues to rise (to new records of exuberant "Fed's got our backs" hope) as NYSE member margin balances surge to new record highs. Relative to the NYSE Composite, this is the most "leveraged' investors have been since the absolute peak in Feb 2000. What is more worrisome, or perhaps not, is the ongoing collapse in investor net worth - defined as total free credit in margin accounts less total margin debt - which has hit what appears to be all-time lows (i.e. there's less left than ever before) which as we noted previously raised a "red flag" with Deutsche Bank. Relative to the 'economy' margin debt has only been higher at the very peak in 2000 and 2007 and was never sustained at this level for more than 2 months. Sounds like a perfect time to BTFATH...
Goldman Reveals "Top Trade" Recommendation #2 For 2014: Go Long Of 5 Year EONIA In 5 Year Treasury TermsSubmitted by Tyler Durden on 11/26/2013 07:27 -0500
If yesterday Goldman was pitching going long of the S&P in AUD terms (the world renowned Goldman newsletter may cost $29.95 but is only paid in soft dollars) as its first revealed Top Trade of 2014, today's follow up exposes Top Trade #2: which is to "Go long 5-year EONIA vs. short 5-year US Treasuries." Goldman adds: "The yield differential between these two financial instruments is currently -61bp, and we expect it to reach around -130bp. On the forwards, the differential is priced at around -95bp at the end of 2014 at the time of writing. We have set the stop-loss on the trade at a spread of -35bp. The choice of Treasuries over OIS or LIBOR on the short leg is motivated by the fact that yields on the former could underperform more than they have already in relative space as the Fed scales down its asset purchase program."
Even the most ardent of bulls would 'admit' that the period of the last 90s was a bubble in US equities. What started at the margin quickly morphed into a euphoric valuation for any and everything that could be pitched. Even The Fed's Jim Bullard 'knew' there was a bubble back then... Today's recovery of the NASDAQ to 4,000 - levels not seen since this period - is quickly dismissed by those that need things to go higher on the basis of earnings, multiples, or some such forward-looking hope-based methodology that reinforces their bias. However, Tobin's Q - among the longest-lived and most well-respected of longer-term valuation methodologies has just reached levels only ever seen during the 1999/2000 bubble. BTFATH valuation?
Just as many expect that the #1 buyer of Treasuries (the Fed) will soon begin paring back its purchases, the top foreign holder (China) may cease buying, thereby opening a second front in the taper campaign. Little thought seems to be given to how the economy would react to 5% yields on 10 year Treasuries (a modest number in historical standards). The herd assumes that our stronger economy could handle such levels. That is why when it comes to tapering, the Fed is all bark and no bite. But the market understands none of this. This is not unusual in market history. When the spell is finally broken and markets wake up to reality, we will scratch our heads and wonder how we could ever have been so misguided.
From consumer and retailer surveys to quantitative data such as household spending and private jet bookings, ConvergEx's Nick Colas has amassed a collection of 10 clues about this year's holiday shopping season. On the plus side, disposable personal income and consumer spending on discretionary items are rising, and travel to Palm Beach via private jet is quite popular this Christmas season. However, consumer confidence surveys are particularly weak, and consumer debt has ballooned to a 5-year high. Roughly equal parts good and bad, Colas' collection of holiday spending indicators points to a mediocre (at best) 2013 shopping season (as we noted earlier).
The story making the rounds these days is that the USA’s industrial economy is on the rise again; that the housing market has “recovered;” that (according to Meredith Whitney) the “central corridor” of the nation (Texas to Minnesota) is the second coming of Japan in the 1960s; that we have more oil than we know what to do with; that the nation has bred a super-race of intrepid entrepreneurial risk-takers like unto no other society in history; and finally that whatever else we are or are not, America is the cleanest shirt in the laundry basket of Mother Earth.
This is all horseshit of course, being smoked in the New York Fed’s crack pipe.
The video covers the race to debase and the manipulation of precious metal prices: "They can mess around with the price all they want, ultimately the price of everything in the long term will be dictated by supply and demand, particulary for a physical commodity like gold".
Most people – certainly most governments and economists – define inflation as a general rise in prices. But this is wrong. Inflation is an increase in the money supply, of which a rising general price level is just one possible result – and not the most common one. More often, excessive money creation shows up as asset bubbles, where the new money, instead of flowing equally to all the products that are for sale at a given time, flow disproportionately into the ‘hottest’ asset classes. In each case, mainstream economists and government officials pointed to modest consumer price inflation as a sign that things were fine. And in each case they were simply looking in the wrong place and completely missing the destabilizing effects of an inflating money supply. Now we’re at it again, with economists, legislators and central bankers using low consumer price inflation as a rationale for even easier money, while ignoring epic bubbles in sovereign bonds, equities, high-end real estate and collectibles around the world. A chart tracking the tangible asset classes of the super-rich would show all lines going parabolic - except one, gold - for now.
- Washington turns bond market upside (FT)
- China Air-Zone Move Expands Field of Islands Spat With Japan (BBG); Japan rejects China claim on airspace over disputed islands (FT)
- 'Great Satan' meets 'Axis of Evil' and strikes a deal (Reuters)
- Iran Pact Faces Stiff Opposition (WSJ)
- Allies Fear a US Pullback in Mideast (WSJ)
- India to resume paying Iran in Euros (Economic Times)
- At 'Business Insider,' it's time to sell (USA Today)
- More ECB currency war jawboning: ECB’s Hansson Says Rate Cut Options Not Fully Exhausted (BBG)
- Spy World Links Plus Obama Ties Stoke Concern About NSA Review (BBG)
- A disunited Europe will struggle even to disintegrate (FT)
Another day, another carry currency-driven futures melt-up to daily record highs (the all important EURJPY soared overnight on the return of the now standard overnight Japanese jawboning of the JPY which sent the EURJPY just shy of a new 4 year high of 138 overnight), and another attempt by the ECB to have its record high market cake, and eat a lower Euro too (recall DB's said the "pain threshold" for the EUR/USD exchange rate - the level at which further appreciation impairs competitiveness and economic recovery - is $1.79 for Germany, $1.24 for France, and $1.17 for Italy) this time with ECB's Hansson repeating the generic talking point that the ECB is technically ready for negative deposit rates. However, with the halflife on such "threats" now measured in the minutes, and soon seconds, the European central bank will have to come up with something more original and creative soon, especially since the EURJPY can't really rise much more without really crushing European trade further.
More than 100,000 protesters congregated at Democracy Monument in Bangkok yesterday to protest Thai PM Yingluck Shiniwatra’s consideration of an amnesty bill to pardon her banned brother Thaksin Shiniwatra, the former Thai PM ousted from the country in a 2006 coup.
In 'An Open Letter To The FOMC' John Hussman lays out in detail the true state of the world that asset-gatherers and Fed members alike seem blinded to. The intent of his letter is not to criticize, but hopefully to increase the mindfulness of the FOMC as to historical evidence, the strength of various financial and economic relationships, and the potentially grave consequences of further extreme and experimental monetary policy. Crucially, as we have heard numerous times in the last few weeks, the Fed sees no bubble, and so, a courtesy to both the investing public and the gamblers at the Fed, Hussman explains the reason that the Fed does not see an “obvious” stock market bubble (to use a word regularly used by Governor Bullard, as if to imply that misvaluations cannot exist unless they smack their observers with a two-by-four).
Until recently, Alan Greenspan’s main argument to exonerate himself of responsibility for the 2007-2009 financial crisis has consisted in the claim that strong Asian demand for US treasury bonds kept interest rates on mortgages unusually low. Though he has not given up on this defense, he is now emphasizing a different tack... His new tack is no better than the old tack.
Anyone suggesting that things are unraveling in fundamental ways quickly encounters a standard reflex response: "same as it ever was."
- Environmental degradation? Same as it ever was: humans have been trashing the environment for thousands of years.
- The influence of money in politics? Same as it ever was: money has always been the mother's milk of politics.
- The dominance of central bankers? Same as it ever was: the banks and the Federal Reserve have been colluding for decades. Income inequality? Same as it ever was: there will always be rich and poor, etc.
- The rise of the National Security State/Empire? Same as it ever was: Manifest Destiny, etc.
History lessons are all well and good, but this constant refrain of "same as it ever was" is actually a pernicious form of perception management, i.e. propaganda. The desperation is obvious, and so is the agenda: mask the reality that things are unraveling, and that it's no longer "same as it ever was."