As we have discussed numerous times, the dash-for-trash in US equities has been insatiable as any and every consequence of screwing up is slowly removed from capitalism (and capital markets). As Goldman's David Kostin notes, companies with weak balance sheets have outperformed peers with strong balance sheets by 49 percentage points during the past two years (89% vs. 40%) with realized volatility of just 7%. Although the trend is daunting - to say the least - Goldman believes it will continue for three reasons...
Forget all the talk about "dots", "6 months", or any other prognostication from the Fed's new leadership about what will happen in the near and not so near future. For the real answer prepare to shelve out the usual fee of $250,000 for an hour with the Chairsatan, or read Reuters' account of what others who have done so, have learned. The answer is a stunner. "At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed's main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke's lifetime. "Shocking when he said this," the guest scribbled in his notes. "Is that really true?" he scribbled at another point, according to the notes reviewed by Reuters."
The threat of "sectoral" sanctions is the latest arrow in America's quiver against Russia's unwillingness to back off and, as the FT reports, the US is seeking support from Europe for these efforts. The problem, as we have discussed, is that energy binds Russia to the rest of the world in a codependent relationship. Consumers – especially in Europe – need Russian oil and gas as much as Russia needs the revenue they bring in. The US believes it can circumvent that obstacle as "the situation calls for a scalpel, not a meat axe... we need targeted asymmetric sanctions that hurt them more than they hurt us." In other words, do you believe in miracles? “In a global economy, each of these actions may also come at a cost to the countries imposing the sanctions that needs to be considered.”
Treasuries are still cheap. The FOMC statement says that “even after employment and inflation are near mandate-consistent levels” the committee may keep “the target federal funds rate below levels” viewed as normal in the longer run. Whenever we read this, we think of Desi Arnaz screaming, “Lucy! You got some ‘splainin’ to do!” Treasury prices do not care if Q4 is around 4%. Economic data matters little for the time being. Prices are being driven more by positions, relative value, and future Fed policy. Markets know the Fed is ending QE. What it really wants to know is the terminal Fed Funds level in the new ‘world order’. In the meantime, stay long.
If ever there was a better indication of the malinvestment boom created by an interfering Fed, this is it. As demand for shipping collapses on real slowing in the global economy - markets have "told" shipbuilders to "build it and they will come"... here is a ship-shipping ship, shipping shipping ships.
Does the economy move in predictable waves, cycles or patterns? There are many economists that believe that it does, and if their projections are correct, the rest of this decade is going to be pure hell for the United States. Many mainstream economists want nothing to do with economic cycle theorists, but it should be noted that economic cycle theories have enabled some analysts to correctly predict the timing of recessions, stock market peaks and stock market crashes over the past couple of decades. Of course none of the theories discussed below is perfect, but it is very interesting to note that all of them seem to indicate that the U.S. economy is about to enter a major downturn. So will the period of 2015 to 2020 turn out to be pure hell for the United States? We will just have to wait and see.
The Dow had its narrowest range day of the year today and volume was dismal (as weak as yesterday's) but we made new record highs so USA USA USA. From the start of the day stocks were in a wild world of low volume levitation of their own as bonds made lower and lower yields and USDJPY was not supportive at all. Once Europe closed, the bid for US equities disappeared and Nasdaq and Russell tumbled, with the Dow and S&P catching down to unch. Bundesbank bullshit sent the EUR lower (cracking below 1.37 at 6 week lows) and thus the USD higher (+0.3% on the week). Treasury yields tumbled (and flattened) all day with 30Y -2bps on the week (and 7Y -6bps from today's highs). VIX had another seizure today (this time spiking up) and closed higher.
It is not coincidental that the middle class and small business are both in decline. Entrepreneurial enterprise and small business have long been stepping stones to middle class incomes and generational wealth, i.e. wealth that is passed down to future generations rather than consumed. As the headwinds to entrepreneurial enterprise and small business rise, the pathway to middle class prosperity narrows.
Some people are either born or nurtured into a time warp and never seem to escape. That’s Janet Yellen’s apparent problem with the “bathtub economics” of the 1960s neo-Keynesians. As has now been apparent for decades, the Great Inflation of the 1970s was a live fire drill that proved Keynesian activism doesn’t work. That particular historic trauma showed that “full employment” and “potential GDP” were imaginary figments from scribblers in Ivy League economics departments—not something that is targetable by the fiscal and monetary authorities or even measureable in a free market economy. Even more crucially, the double digit inflation, faltering growth and repetitive boom and bust macro-cycles of the 1970s and early 1980s proved in spades that interventionist manipulations designed to achieve so-called “full-employment” actually did the opposite—that is, they only amplified economic instability and underperformance as the decade wore on.
The US approach to the Russia/Ukraine situation reflects a serious misunderstanding of the situation. Russia has little choice but to try to raise the price of products it is selling, any way it can. It needs to cut out those who cannot afford its products, including the Ukraine. If Europe increasingly cannot afford its products, Russia needs to find customers who can afford them. There is little chance that the United States is going to be able to help Europe with its natural gas needs in any reasonable timeframe. Our best chance at keeping the global economy “working” for a little longer is to try to keep globalization working as best we can. This will likely require “making nice” to countries we are unhappy with, and putting up with what looks like aggression. Policymakers like to think that the US has more power than it really does, and like to encourage stories suggesting great power in the press. Unfortunately, these stories are not true; we need policymakers who understand our real situation
Confused by the market? You are not alone with irrational and "Fear of Missing Out" momentum trades and (not so great) sector re(un)rotation all that matters (as has been the case for years with fundamentals not relevant for about 24 months now), so here are some tips from Scotiabank's Guy Haselmann who believes "market noise can be simplified into the following: QE= risk on, End of QE=risk off. QE is now half way toward ending, so now is the time to adjust. The fact that…… EM central banks are hiking, China is attacking its credit bubble, and Japan hiked its VAT tax while the “third arrow” is M.I.A., are also reasons to de-risk. If sanctions on Russia expand to products or industries, then real problems to EU growth will arise. This is something to watch carefully."
Everyone knows that when it comes to apologists and scapegoats, Q1 was all about weather excuses, and as SocGen already showed earlier today when it took a $730 million charge on its Russian subsidiary, Q2 misses will all be Ukraine's fault, which is ironic because as recently as a month ago experts were screaming over each other how little Ukraine matters for the global economy, how meaningless Russian exposure is to western banks and so on. But while one can at least superficially justify a bank provisioning against deposit flight and the accumulation of bad debt in a country in which paying one's debt is the last thing on the population's mind, a new and quite different victim of the Ukraine crisis was revealed earlier today when beer titan Carlsberg swung to a net loss and issued a profit warning: beer.
News that China is soon to surpass the United States as the largest economy in the world is a stark reminder of how the American people are harmed by the welfare-warfare state, crony capitalism, and fiat currency. The only way to avoid continuing collapse is to finally reject an interventionist foreign policy, stop bailing out and subsidizing politically powerful industries, and restore a free market in money.
Capture, corruption, irreparable harm--and little hope for change.