Borrowing heavily from Albert Edwards "Ice Age" analogy of our new normal, PIMCO's Bill Gross, after explaining why he does not have a cell phone, discusses the "frigidly low" levels of "The New Neutral" in this week's letter. Confirming Ben Bernanke's "not in my lifetime" promise for low rates and a lack of normalization, Gross explains that the "the new neutral" real policy rate will be close to 0% as opposed to 2-3% (just as in Japan) leaving an increasingly small incremental rise in rates as potentially responsible for popping the bubble. Gross concludes, "if 'The New Neutral' rates stay low, it supports current prices of financial assets. They would appear to be less bubbly," clearly defending the valuation of bonds knowing that he can't expose stocks as 'bubbly' without exposing his firm to more outflows.
Nope, no bubble here... The FT reports that issuance of payment-in-kind (PIK) notes have doubled this to reach $4.2bn. "We call it the yield-hunger games," jokes one bond manager as even the most modest pick-up in yield is in great demand - no matter what the risk. As another manager warns, "I have no doubt that the resurgence of PIKs and other risky debt deals is a sign that we are setting the stage for the next down cycle."
In just about any realm of activity this nation does not know how to act. We don’t know what to do about our mounting crises of economy. We don’t know what to do about our relations with other nations in a strained global economy. This is a society in deep danger that doesn’t want to know it.
The officially released agenda of the prestigious Bilderberg club meeting (attendees listed here) is not true, claims Russia Today show host Daniel Estulin, a longtime watcher of the ‘secret world govt’ group. He says he obtained the real agenda for this year’s gathering in Copenhagen. An insider leaked the list of talking points for the ongoing Bilderberg conference to the investigative journalist last week, he said. The list has nine items, seven of which he shared... from Nuclear diplomacy and the disturbing rise of Nationalism; it was a focus on Barack Obama's foreign policy that drew our attention most closely...
As the U.S. Greater Depression progresses, depicted most vividly in the collapse in the “civilian participation rate” (the number of people working in the economy) and the “velocity of money” (the heartbeat of the economy) - indicating an economy which is not merely in decline, but rather is being sucked downward in a terminal (and accelerating) death-spiral. There is another even more concerning statistic: U.S. “gasoline consumption” – as measured by the U.S. EIA itself – has plummeted by nearly 75%, from its all-time peak in July of 1998. A near-75% collapse in U.S. gasoline consumption has occurred in little more than 15 years... "recovery"
"...the West, on the other hand, is full of debt and consumption. America’s greatest exports are now infinite quantities of paper currency, drone attacks, and arrogant regulations like FATCA. It doesn’t take a rocket scientist to see where this is going. The West is running out of steam, and the Social Contract subtext is breaking down. Parents are no longer able to provide a better life for their children."
If clichés reflect overly common (if therefore unappreciated) wisdom, then we finally have a good explanation for why risk assets continue to rally. No, there are actually not “More buyers than sellers” – money flows are negative over the last month for both U.S. equity mutual funds and ETFs. And forget about investors “Downgrading on valuation” as stocks climb higher and higher; truth be told, that’s not even really a thing (unless you work on the sell side). Nope, this is a “Flight to quality”, “don’t fight the Fed”, “never short a dull market” environment with “easy comps” from a long rough winter. Want to call a top somewhere around here? Remember that “Markets discount events 6 months in the future.” A “Santa Claus rally” in June? That would fit the one cliché we know is actually the market’s True North: it will do exactly what hurts the most “Smart” investors. And that would be to rally further as the doomsayers double down and the timid cling to their bonds and cash.
The temptations of extrapolation are hard to resist. The trend exerts a powerful influence on markets, policymakers, households, and businesses. But discerning observers understand the limits of linear thinking, because they know that lines bend, or sometimes even break. That is the case today in assessing two key factors shaping the global economy: the risks associated with America’s policy gambit and the state of the Chinese economy. It is often said that a crisis should never be wasted: Politicians, policymakers, and regulators should embrace the moment of deep distress and take on the heavy burden of structural repair. China seems to be doing that; America is not. Codependency points to an unavoidable conclusion: The US is about to become trapped in the perils of linear thinking.
Anyone who buys their own groceries (as opposed to having a full-time cook handle such mundane chores) knows that the cost of basic foods keeps rising, despite the official claims that inflation is essentially near-zero. Common-sense causes include severe weather and droughts than reduce crop yields, rising demand from the increasingly wealthy global middle class and money printing, which devalues the purchasing power of income. While these factors undoubtedly influence the cost of food, it turns out that food moves in virtual lockstep with the one master commodity in an industrialized global economy: oil.
One week ago we reported that while Russia was dumping a record amount of Treasurys it was buying gold, or some 900,000 ounces to be precise. Today we learn that as Russia continues to purchase gold, and is likely taking advantage of the recent rout in gold prices, it certainly won't be storing its physical metal with any of the western Central Banks. According to Reuters, shortly after Russia and China announced their historic gas deal, Vladimit Putin said at the recent International Economic Forum, that Russia need to ensure its gold and currency reserves are secure. And not just Russia: China too. Because apparently when it comes to speaking for "hard" monetary policy, Putin is now authorized to speak for both nations.
"For us (Russia and China) it is important to deposit those (gold and currency reserves) in a rational and secure way," Putin said. "And we together need to think of how to do that keeping in mind the uneasy situation in the global economy."
Do not look at this chart if you remain of the opinion that everything is fine in the world. For the 3rd time in the last 4 months, world trade volumes dropped. The 0.5% fall in March - it must have been weathery all over the world? - continues the biggest plunge in global trade since May 2009. As WSJ reports, exports from developing economies in Asia recorded the largest decline, a drop of 4.5%. Central and Eastern Europe was the only region to record a rise in exports as the decline in trade flows is consistent with other evidence that suggests the global economy got off to a weak start this year. So, $12 trillion of global money printing and world trade is unable to sustain growth...
Central banks see their main role now in supporting asset markets, the economy, the banks, and the government. They are positively petrified of potentially derailing anything through tighter policy. They will structurally “under-tighten”. Higher inflation will be the endgame but when that will come is anyone’s guess. Growth will, by itself, not lead to a meaningful response from central bankers. No country has ever become more prosperous by debasing its currency and ripping off its savers. This will end badly...
It is not too early to ask how the present US business cycle expansion, already more than five years old, will end. The history of the last great US monetary experiment in “quantitative easing” (QE) from 1934-7 suggests that the end could be violent. Autumn 1937 featured one of the largest New York stock market crashes ever accompanied by the descent of the US economy into the notorious Roosevelt Recession. As we noted previously - it's never different this time...
If you believe that the U.S. economy is heading in the right direction, you really need to read this article. As we look toward the second half of 2014, there are economic red flags all over the place.