As the capital markets from Shanghai to New York were melting down in ways hearkening back to the early days of the prior financial crisis - a period of time many would like to forget (or act) as if it never happened - the Nobel Laureate economist Paul Krugman decided it was time once again to weigh in with what will surely be viewed by the so-called “smart crowd” as a brilliant perspective on what ails the world: Not enough debt. He came out blazing with what seems the only bullet in his arsenal as a cure-all for what ever the ailment might be (e.g., debt.) as he argues this view in his latest: Debt Is Good.
A non-bombastic discussion of market forces and what to expect next
The current bubble is not comparable to the mania that culminated in the year 2000. At the time, one could actually watch out for very close equivalents to the shoeshine boy, given the huge participation of retail traders in the market. Nowadays we have a “bubble of professionals”, so we must look for something slightly different. And we have found it – or rather, it actually fell into our lap yesterday, or rather, suddenly appeared in our inbox.
Imagine that the Food and Drug Administration (FDA) was a corporation, with its shares owned by the nation's major pharmaceutical companies. How would you feel about the regulation of medications? Whose interests would this corporation be serving? Or suppose that major oil companies appointed a small committee to periodically announce the price of a barrel of crude in the United States. How would that impact you at the gasoline pump? Such hypotheticals would strike the majority of Americans as completely absurd, but it's exactly how our banking system operates.
When paying a premium for equities, or any asset for that matter, one runs the serious risk of capital impairment. Worse, most professional investment managers falling prey to the bullish sentiment currently surrounding this period of extreme valuations will likely not live up to their overriding fiduciary duty – the preservation of wealth. Following the herd may have its benefits at times, but following the herd over a cliff never ends well. As Seth Klarman warned. “Risk is not inherent in an investment; it is always relative to the price paid”
BofA Pushes The Panic Buttton: "Dow Theory Sell Signal, Key Supports Broken, Semis Sinking, No Capitulation"Submitted by Tyler Durden on 08/21/2015 12:33 -0400
Dow Theory flashes sell signal. S&P 500, NYSE & Russell 2000 all closed below key supports.
No tactical capitulation. Not 90% down. ARMS below 2.0. 10-day total put/call ratio not showing panic. But VXV/VIX oversold.
The musings of the many wonderful minds who preach to goldbugs, contrarians, real anarchists, real patriots, conservatives and republicans, moralists, real believers in genuine free markets, solution seekers and a combination of them all, have had a significant impact on my worldview.
In the Western world insouciance rules governments as well as peoples, and most likely also everywhere else in the world. It remains to be seen whether Russia and China have any clearer grasp of the reality that confronts them.
"The larger problem with repurchases is that debt-financed buybacks effectively put investors on margin. As corporations have borrowed in order to aggressively buy back their stock near the highest market valuations in history, existing stockholders have quietly become heavily leveraged, without even realizing it."
In the current Theater of the Absurd, the world's most powerful central bank is relying on a novelty tune to maintain the hyper-speculative status quo. It would be humorous if it wasn't so tragic.
- Crude prices fall towards $40 on global glut (Reuters)
- China Central Bank Injects Most Funds Since February as Money Rates Increase (BBG)
- Divided Fed Puts Yellen on Hot Seat (Hilsenrath)
- So Long September: Bond Traders Defer Their Date With the Fed (BBG)
- More Foods Boast Non-GMO Labels—Even Those Without GMO Varieties (WSJ)
- UN to let Iran inspect alleged nuke work site (AP)
- IAEA says access to Iran's Parchin military site meets demands (Reuters)
- Time to End Quarterly Reports, Law Firm Says (WSJ)
Last year, when alternative economic analysts were warning that the commodities crush and oil crash just after the taper of QE3 were blaring signals for a downshift in all other financial indicators, the general response in the mainstream was that we were overreacting and paranoid and that the commodities jolt was temporary. Perhaps the fact needs repeating that it’s not paranoia if they are really out to get you. Only a short time later, it is truly amazing how the rhetoric from the mainstream economic yes-men is changing. So now that the mainstream is willing to report on clear economic dangers, what happens next?
At the risk of sounding like a broken record we'd like to say a bit more about economists' tendency to get their monetary history wrong; in particular, the common myths about the gold standard. If there's one monetary history topic that tends to get handled especially sloppily by monetary economists, not to mention other sorts, this is it. Sure, the gold standard was hardly perfect, and gold bugs themselves sometimes make silly claims about their favorite former monetary standard. But these things don't excuse the errors many economists commit in their eagerness to find fault with that "barbarous relic." The point, in other words, isn't to make a pitch for gold. It's to make a pitch for something - anything - that's better than our present, lousy money.
The rise of populism is not just a U.S. issue. Globalization and deregulation, especially with regard to the open adoption of new technology and work structures, is increasingly being called into question. As we have discussed previously, there is increasing potential that major political and economic changes will emerge from this vote. The emergence of Donald Trump and Bernie Sanders is a reflection that the populists want a change in the direction of American policy. We will be watching closely to see whether any serious changes result.
When we see guys like Bernie Sanders get visibly angry at guys like Alan Greenspan it behooves all of us to go beyond the entertainment of it or some prima facie agreement and to truly understand why the anger is justified. If we were to all take the responsibility to understand the lifeblood of our American existence i.e. the economy, we will most certainly be moved to remove not only the policymakers but the system that together serve only those at the top of the economic food chain and at a cost to the rest of us. When we do we will be asking why in the hell is no one yelling at Janet Yellen??