Bubbles are created when investors do not recognize when rising asset prices get detached from underlying fundamentals, but perhaps George Soros' perspective on bubbles is most prescient: "financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. The degree of distortion may vary from time to time. Sometimes it's quite insignificant, at other times it is quite pronounced. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. Eventually a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction. Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions." Does an asset bubble currently exist? Ask anyone and they will tell you "NO." However, maybe it is exactly that tacit denial which might just be an indication of its existence.
- China to Ease One-Child Policy (WSJ), China announces major economic and social reforms (Reuters)
- Consumers line up for launch of PlayStation 4 (USAToday)
- Trust frays between Obama, Democrats (Politico)
- Yellen Stands by Fed Strategy (Hilsenrath)
- Hero to zero? Philippine president feels typhoon backlash (Reuters)
- Brussels warns Spain and Italy on budgets (FT)
- Moody’s Downgrades Four U.S. Banks on Federal Support Review (BBG)
- CIA's Financial Spying Bags Data on Americans (WSJ)
- Germany Digs In Against Risk Sharing in EU Bank-Failure Plan (BBG)
- Bill Gates wants Norway's $800 billion fund to spend more in Africa, Asia (RTRS)
These men are masters of the capital markets. They are voting with their feet and pulling their capital out of them.
It is undeniable that America is thoroughly addicted to fiat stimulus. Every aspect of our economy, from stocks, to bonds, to banks, and by indirect extension main street, is now utterly dependent on the continued 24/7 currency creation bonanza. The stock market no longer rallies to the tune of increased retail sales, growing export markets or improved employment expectations. In fact, “good” economic news today is met with panic and market sell-offs! Why? Because investors and banks still playing equities understand full well that any sign of fiscal improvement might mean the end of the private Federal Reserve’s QE pajama party. They know that without the Fed’s opiate-laced lifeline, the economy dies a fast and painful death. All mainstream economic news currently revolves around the Fed, as pundits clamor to divine whether the latest signals mean the free money will flow, trickle, or dry up. At the edge of the Federal Reserve’s 100th anniversary, it is vital that we see the current developments for what they really are – history changing, in a fashion so violent they are apt to scar America forever.
Still paying your 2-and-20, despite Stanley Druckenmiller's surprise that you would, for someone to pick stocks for you? Perhaps a glance at the following 3 charts will awaken the animal investing spirits in some (or just a 'fold' from many). This is what happens when there is only one economic market-driving factor (cough Fed cough) and too many coat-tail-clinging hedge fund managers (and newsletter writers) chasing too few real alpha opportunities. The correlation between the S&P 500 and hedge fund returns has never been higher and is approaching 1, excess return (alpha) is near its all-time lows, and, sadly, there is an extremely high correlation between styles and tilts. All your hedge fund alpha are belong to Ben.
Stanley Druckenmiller's World View: "Catastrophic" Entitlement Spending, "Bizarre" & "Illusory" Asset Markets, & Beware The TaperSubmitted by Tyler Durden on 09/11/2013 20:50 -0500
During an extended interview with Bloomberg TV, billionaire investor Stanley Druckenmiller provided a seemingly fact-based (and non-status-quo sustaining, commission-taking, media-whoring) perspective on a very wide variety of topics. The brief clips below touch the surface, with the detailed annotated transcript below providing details, as Druckenmiller opines on the looming catastrophe in entitlement spending "when you hear about the National debt being $16tn; if you actually took what we promised to seniors and future taxes, present value to both of them, that number is $200tn," why the Fed exit will be a big deal for markets, "it is my belief that QE has subsidized all asset prices and when you remove that, the market will go down," and his changing views on Obama "I was drinking the hope and change Kool-aid... in hindsight, he probably needed more experience for this job." Looking back to the financial crisis, he warns, "...a necessary condition to have a financial crisis, in my opinion, is too loose monetary policy that encourages people to take undue risk and go on the risk curve and do silly things. We should have shut this down in 1998, 1999. The NASDAQ bubble, we should have raised rates, we didn’t. Then we got the implosion."
If there is any one strikingly obvious feature of the U.S. economy in the past 15 years, it's the serial asset bubbles, one after another. So who benefits from serial bubbles? The financial sector and the central government...
The yield on 10 year U.S. Treasuries is skyrocketing, the Dow has been down for 5 days in a row and troubling economic news is pouring in from all over the planet. The much anticipated "financial correction" is rapidly approaching, and investors are starting to race for the exits. We have not seen so many financial trouble signs all come together at one time like this since just prior to the last major financial crisis. It is almost as if a "perfect storm" is brewing, and a lot of the "smart money" has already gotten out of stocks and bonds. Of course a lot of people believe that we will never see another major financial crisis like we experienced in 2008 ever again. A lot of people think that this type of "doom and gloom" talk is foolish. It is those kinds of people that did not see the last financial crash coming and that are choosing not to prepare for the next one even though the warning signs are exceedingly clear. The following are 18 signs that global financial markets are heading for a vicious circle...
Gold analysts are the most bullish in five months according to Bloomberg. Thirteen analysts surveyed by Bloomberg expect prices to rise next week, four were bearish and five neutral, the highest proportion of bulls since March 8.
It just keeps going form bad to worse for William Ackman. The so-called retail expert tried to diffuse the situation today by announcing a massive $2 billion position in Airgas, only for Herbalife to go right back front and center, following news moments ago from CNBC that none other than George Soros has taken a long stake in Herbalife, and not just any stake but a "top 3" position. We haven't done the math but the float out there must be getting dangerously low for Ackman: low enough to where the Volkswagen scenario we predicted in early January (just as we predicted the imminent epic short squeeze) may finally come in play as there is not enough float to cover Ackman's short, and certainly not when the longs decide to pull all the borrow. If and when the Ackman margin calls hit, we hope that Soros will accept shares of Airgas as deliverable. In the meantime, the stock is up 173% since December, or when we said to go long following Whitney Tilson's "short."
"We’re getting to that point where either one of two things are going to happen; either central banks are going to stop all this [money printing], or the market is going to force them to stop it. It looks like we may be having a juncture of both... where the Fed is getting worried... and at the same time, the market is jumping in and saying, ‘Yes, it’s insane what you’re doing, and this has to end.’ And if it’s not ending now, it’s going to end sometime in the next year, because this cannot go on - it’s too insane."
"There are a lot of leveraged players who are now being forced to sell [gold]. Usually when you have this kind of forced liquidation, you’re getting closer to a bottom, maybe not the final bottom, but certainly close to a bottom."
Just three weeks ago we noted Apollo Group's Leon Black's comment that his firm was "selling everything not nailed down," and that he sees "the market is pricey... in our view, priced for perfection." It seems he is not alone in the 'buy-low-sell-high' crowd. If wonderful times are ahead for U.S. financial markets, then why is so much of the smart money heading for the exits? Does it make sense for insiders to be getting out of stocks and real estate if prices are just going to continue to go up?
Unless there's a shock to the system when people start seeking safety, there's not much upside momentum for gold.
The mistake Abe is making is to think the same trick that worked for the US will work for them. The problem, as Shirakawa no doubt realizes, is that the two country’s situations are not at all analogous, because the yen isn’t really a reserve currency in the same way the dollar is. There is no population of natural sovereign buyers who will be forced to print their own currency to mop up excess yen, as there is for the dollar. No sovereign is going to want to dramatically increase the allocations of their country’s reserves to the yen, not when it’s in the middle of being deliberately devalued, or really ever. Russia and China and Saudi Arabia don’t need any more yen, they have plenty. Oil isn’t priced in yen. Japan isn’t the world’s largest economy, or even its second largest. World trade isn’t conducted in yen. The emerging economies will just let it collapse. There is no natural sovereign sink for yen to drain into, as there is for the dollar, no group of buyers of last resort with bottomless pockets and no choice but to buy.
History never changes. Or, at least it changes very slowly indeed. So here we are, like those before us, warning of our own Great Depression, of our own World War, or of even larger cycles like the fall of the English, Spanish, or Roman empires. And so far as we can tell, few listen and nothing changes. Why? Because it isn’t time. Understanding long-term cycles, and how they shape our spectrum of responses in periods of crisis and transformation is key to comprehending what is to come (and how we will allow it to affect us). Do you really think your ancestors didn’t see the Depression coming in 1921 or in 1929? Of course they did. The Balloon Option-ARM mortgage had just been invented, creating a housing boom larger and even more groundless as our own, immortalized by the Marx Brothers in The Cocoanuts. They warned the world then just as we do now, and no one listened then, just as they don’t now. Why? It wasn’t time.