Ever since an über-strong U.S. dollar crushed the export sector in the mid-1980s, the U.S. economy hasn’t looked quite the same. This is not a problem of the past however, as export growth already lags behind every one of the past ten expansions, even the 1980s, thanks to a drop in the first quarter. The chart below shows that exports are no longer distinct from other parts of the economy (nearly all of them) that haven’t measured up to a “normal,” credit-infused, post-World War II business cycle. Together with emerging global risks, it begs the question of whether sagging exports can drag the U.S. into recession.
According to the latest CapGemini wealth report the number of high net worth individuals increased by nearly 1.8 million in the past year, the second biggest surge since 2000, which also happened to be the crazy days of the first tech bubble (not to be confused with the current tech bubble). In other words, the epic, unprecedented stock bubble reflated by the world's coordinated central banks, has succeeded. Succeeded, that is, if its goal was to make the world's richest people wealthy beyond their wildest dreams. As for everyone else, just over 7 billion people, better luck next time.
- Currency Probe Widens as U.S. Said to Target Markups (BBG)
- Battle for Iraq refinery as U.S. hesitates to strike (Reuters)
- Ukraine forces battle separatists after truce 'refused' (Reuters)
- Fed Dots Ignored as Investors Focus on Yellen’s Message (BBG)
- Retirees Suffer as $300 Billion 401(k) Rollover Boom Enriches Brokers (BBG)
- American Apparel ousts CEO; source says Dov Charney 'will fight like hell' (LA Times)
- House Panel Is Subpoenaed as Trading Probe Heats Up (WSJ)
- GM Officials Ignored Alert on Car Stalling (WSJ)
- Russia’s $20 Billion Bond Void Filled by China to Mexico (BBG)
it is suddenly not fun being a Fed president (or Chairmanwoman) these days: with yesterday's 2.1% CPI print, the YoY rate has now increased for four consecutive months and is above the Fed's target. Concurrently, the unemployment rate has also dipped well below the Fed’s previous 6.5% threshold guidance, in other words the Fed has now met both its mandates as set down previously. There have also been fairly unambiguous comments from the Fed’s Bullard suggesting that this is the closest the Fed has been to fulfilling its mandates in many years. Finally, adding to the "concerns" that the Fed may surprise everyone were BOE Carney’s comments last week that a hike “could happen sooner than the market currently expect." In short: continued QE here, without a taper acceleration, merely affirms that all the Fed is after is reflating the stock market, and such trivial considerations as employment and inflation are merely secondary to the Fed. Which, of course, we know - all is secondary to the wealth effect, i.e., making the rich, richer. But it is one thing for tinfoil hat sites to expose the truth, it is something else entirely when it is revealed to the entire world.
The situation in Iraq is serious, and is probably going to get worse before it gets better. The potential for this recent action to morph into a regional conflict is very high. That means that oil could go a lot higher, and if it does, we can expect the odds of a global economic recession and an attendant financial crisis to go up considerably from here. Before we dive into what's actually happening over there right now, we need to begin with a longer and deeper historical context of the region, which is essential to understanding pretty much everything in the Middle East. The western press likes to report on things as if they suddenly occur for no discernible reason, context-free and unconnected to our actions and activities over there. But the story of the Middle East is a story of intense external meddling -- especially by the US, recently.
Back in Feb 2013 we introduced the "Brent Vigilantes" and reminded traders how stock markets (and macro economies) react to shifts in the oil price with the two trading together to a 'tipping point' at which point strocks belief in growth breaks. We further confirmed that this is even more worrisome in the case of an oil price shock which strongly suggests that VIX at 12 is not pricing in the volatility that we have seen in the past when the oil complex starts to shake.
The situation in Ukraine and Iraq have gone from bad to worse. There is the potential for a wider Middle East conflict as the region remains a ‘powder keg.’ Iraq may be the match that sees the region explode into chaos and war - with attendant effects on global oil prices and the global economy.
Believe it or not, the main driver of risk overnight had nothing to do with Iraq, with the global economy or even with hopes for more liquidity, and everything to do with a largely meaningless component of Japan's future tax policy, namely whether or not Abe (who at this pace of soaring imported inflation and plunging wages won't have to worry much about 2015 as he won't be PM then) should cut the corporate tax rate in 2015. As Bloomberg reported, Abe, speaking to reporters in Tokyo today after a meeting with Finance Minister Taro Aso and Economy Minister Akira Amari, said the plan would bring the rate under 30 percent in a few years. He said alternative revenue will be secured for the move, which requires approval from the Diet.
Yesterday, the IMF and World Bank issued warnings about rising interest rates, housing crashes and the global economy. The World Bank’s chief economist is inadvertantly offering important advice to investors and savers when he said that "now is the time to prepare for the next crisis ..."
In order to back the dollars now in circulation and on deposit -- about $2.7 trillion -- with the approximately 261 million ounces of gold believed to be held by the U.S. government, gold prices would have to rise as high as $10,000 an ounce. Who said gold is not money?
There is much hope that after a dismal Q1 GDP report of -1% annualized growth in the domestic economy, that Q2 will see a sharp rebound of between 3-4% according to the bulk of economists. The Federal Reserve is predicting that the U.S. economy will grow as strongly as 2.8% in real terms for the entirety of 2014. The achievement of the Fed's rather lofty goal would require a real 4% annualized growth in each of the next three quarters. The problem with this assumption is that the last time that the U.S. economy grew at 4% or more, over three consecutive quarters, was in 1983.
"I am not God, I am not here to judge who is right and who is wrong, but if you look at geopolitics in Asia from a Chinese perspective, its completely unacceptable in the long run to have American military presence in Asia," blasts Marc Faber.
"As a large power like France and Britain and America, you might be able to push around small countries, but you can't push around a country that has twice the population of Europe and the United States, and has become a relatively modern state with military that is very powerful."
Henry Ford once said, “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” We hope this brief discussion raises that 'understanding'.
Because we are living in the Golden Age of Central Bankers, and that wreaks havoc on the fundamental nature of market expectations data....
- the VIX is not a reliable measure of market complacency.
- the wisdom of crowds is nonexistent.
- fundamental risk/reward calculations for directional exposure to any security are problematic on anything other than a VERY long time horizon.
- I’d rather be reactive and right in my portfolio than proactive and wrong.
The Golden Age of the Central Banker is a time for survivors, not heroes. And that’s the real moral of this story.
“You know what the difference is between an Economist/Analyst, and a Business owner? When a Business owner makes a prediction on his or her business and is wrong – the business could wind up in bankruptcy. When the Economist/Analyst makes a wrong prediction about business – they just make another prediction.”