Stocks at record highs... Unemployment rates at multi-year lows... magical job creation 'impressive'... President Obama has a lot to proclaim "mission accomplished" over - except its all fallacious (as Wal-Mart's CEO recently explained). Of course, this will all be solved if everyone was paid 'fairly' at least $15/hour despite the greatest irony of Obama's inequality fight is that "his policies are squeezing the middle class and causing the Fed – with the President’s encouragement – to engage in the radical monetary policy, which is exacerbating inequality. This simple truth cannot be repeated often enough."
Institutionalizing the speculative excesses that inflated the previous housing bubble has fed magical thinking and fostered illusions of phantom wealth and security.
As most Fed watchers know, last week was interesting because Janet Yellen, speaking at IMF came out and said something quite surprising. In a nutshell, she said “It’s not the Fed’s job to pop bubbles”. While many market participants immediately took this to mean, “To the moon, Alice!” and started buying equities hand over fist, there’s another possible explanation for Mrs. Yellen’s proclamation of unwillingness: The Fed could be preparing to do exactly what it said it wouldn’t. Bringing forward the next leg of the cycle, may well be on the Fed’s agenda.
The distinction between the world's only two types of traders (good vs bad) has been a very vague one. Until now. According to a new study by researchers at Caltech and Virginia Tech that looked at the brain activity and behavior of people trading in experimental markets where price bubbles formed, an early warning signal tips off smart traders when to get out even as the "dumb" ones keep ploughing in and chasing the momentum wave. In such markets, where price far outpaces actual value, it appears that wise traders receive an early warning signal from their brains—a warning that makes them feel uncomfortable and urges them to sell, sell, sell.
Many seem to believe that if we worked our way out of debt problems in the past, we can do the same thing again. The same assets may have new owners, but everything will work together in the long run. Businesses will continue operating, and people will continue to have jobs. We may have to adjust monetary policy, or perhaps regulation of financial institutions, but that is about all. I think this is where the story goes wrong. The situation we have now is very different, and far worse, than what happened in the past. We live in a much more tightly networked economy. This time, our problems are tied to the need for cheap, high quality energy products. The comfort we get from everything eventually working out in the past is false comfort.
"US lending to businesses is reaching record levels but banks are privately warning that the activity should not be seen as evidence of an economic recovery." And the stunner: "Much of the corporate lending is going to fund payouts to shareholders, finance acquisitions and fuel the domestic energy boom, bankers say, rather than to support companies’ organic growth."
History suggests that previously sound assumptions about financial security and recession-proof sectors may not apply in the next recession.
As is now well-known, following the news broken first by Zero Hedge in May, Belgium, or rather "Belgium" (because clearly someone is using Belgian-based Euroclear as a front to cover their insatiable appetite for US paper) has emerged as the biggest buyer of US Treasurys in 2014, close to surpassing even the Federal Reserve as the biggest monetizer of the US deficit. But what about other countries in the world, such as for example France: a country whose economy virtually everyone admits is in shambles and yet whose bond yields have followed the rest of the world to slide to near record lows of 1.70% most recently. Here is the answer.
Felix Zulauf, James Montier and David Iben: Three legendary investors share their views on financial markets. Everything is pricey ("we will continue to swim in a sea of liquidity; but there might be other events and developments that may not be camouflaged by liquidity which could cause a change of investor expectations.") the European periphery is a bubble ("The Euro crisis is not over...the European economies are not going to change for the better for years to come despite all the cheating and breaking of laws"), Value investors need to venture to Russia ("when you look at today’s opportunity set, you’re left with a set of assets where nothing looks attractive from a valuation point of view") or buy gold mining stocks (" The down cycle could be much bigger than anybody believes if the market realizes that all the actions taken in recent years do not work.") Summing it all up, "there is no question that [sovereigns] lack the fundamental economic base to finally service their debts," trade accordingly.
The jobs report has little value if we don't peer beneath the glossy veneer.
Based on historical patterns and the alarming state of our current monetary system, Mike Maloney, monetary historian believes the fiat US dollar is in its last years as a viable currency. He sees its replacement as inevitable in the near term - as in by or before the end of the decade - "All of this is converging with the crazy experiments the Federal Reserve has done. During the last three monetary shifts, it was only the world's central banks and big international banks that were affected and were worried. The common man didn't even know what was going on. With this one, everybody is going to feel it. Everybody is going to know it. You will either be a winner or a loser, but everybody is playing this game."
The revolution is already in motion. It is a peaceful and intellectual revolution - not one of violence or force, and that is why it will succeed.
"The system we have now is one in which the Fed decides, through a Politburo of planners sitting in Washington, how much liquidity is necessary, what the interest rate should be, what the unemployment rate should be, and what economic growth should be. There is no honest pricing left at all anywhere in the world because central banks everywhere manipulate and rig the price of all financial assets. We can’t even analyze the economy in the traditional sense anymore because so much of it depends not on market forces, but on the whims of people at the Fed."
The selloff last year was a desperate warning about the lack of resilience in credit and funding. That repo markets persist in that is, again, the opposite of the picture Janet Yellen is trying to clumsily fashion. Central banks cannot create that because their intrusion axiomatically alters the state of financial affairs, and they know this. It has always been the idea (“extend and pretend” among others) to do so with the expectation that economic growth would allow enough margin for error to go back and clean up these central bank alterations. That has never happened, and the modifications persist. Resilience is the last word we would use to describe markets right now, with very recent history declaring as much.
"First they ignore you, then they ridicule you, then they fight you, and then you win." Mahatma Gandhi
"It is no crime to be ignorant of economics... but it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." - Murray Rothbard