Gross Domestic Product
"I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing.... We were working feverishly to preserve the impression that the Fed knew what it was doing... The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.... Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets. As for the rest of America, good luck..... The implication is that the Fed is dutifully compensating for the rest of Washington's dysfunction. But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street's new "too big to fail" policy."
"We need help!" is the sad handwritten sign hanging outside a shuttered church in the Philippine town of Tacloban surrounded, as Reuters reports, by uncollected corpses and canyons of debris. Demand for relief is huge and despite 66 tons of supplies having landed since Saturday, they are not reaching those who need them the most as "people are roaming around the city, looking for food and water," because aid trucks from the airport struggle to enter the city because of the stream of people and vehicles leaving it. "People are angry. They are going out of their minds," warned one aid-worker as relief was delayed due to security concerns "there might be a stampede," after dark. The terrible state of affairs is summed up by on aid worker, "there is nothing left to loot... even if you have money there is no food to buy. There is nothing here." Police are trying to enforce a curfew...
There is currently a debate being waged on Wall Street. On one side of the argument are individuals who believe that we have entered into the next "secular bull market" and that the markets have only just begun what is an expected multi-year advance from current levels. The other side of the argument reiterates that the current market advance is predicated on artificial stimulus and that the "secular bear market" remains intact, and the next major reversion is just a function of time. The series of charts below is designed to allow you to draw your own conclusions. While it is certainly easy to be swept up in the daily advances of the stock market casino, it is important to remember that eventually the "house always wins." What has always separated successful professional gamblers from the weekend sucker is strictly the difference of knowing when to cash in your chips and step away from the table.
The latest myth of a European recovery came crashing down two weeks ago when Eurostat reported an inflation print of 0.7% (putting Europe's official inflation below that of Japan's 1.1%), followed promptly by a surprise rate cut by Mario Draghi which achieves nothing but sends a message that the ECB is, impotently, watching the collapse in European inflation and loan creation coupled by an ongoing rise in unemployment to record levels (not to mention the record prints in the amount of peripheral bad debt). Needless to say, all of this is largely aggravated by the EURUSD which until a week ago was trading at a two year high against the dollar, and while helpful for Germany, makes the so-needed external rebelancing of the peripheral Eurozone countries next to impossible. Which means that like it or not, and certainly as long as hawkish Germany says "nein", Draghi is stuck in a corner when it comes to truly decisive inflation-boosting actions. But what is Draghi to do? Well, according to BNP's Paul-Mortimer Lee, it should join the "no holds barred" monetary "policy" of the Fed and the BOJ, and promptly resume a €50 billion per month QE.
Investors who believe that history has lessons to teach should take our present concerns with significant weight, but should also recognize that tendencies that repeatedly prove reliable over complete market cycles are sometimes defied over portions of those cycles. Meanwhile, investors who are convinced that this time is different can ignore what follows. The primary reason not to listen to a word of it is that similar concerns, particularly since late-2011, have been followed by yet further market gains. If one places full weight on this recent period, and no weight on history, it follows that stocks can only advance forever. What seems different this time, enough to revive the conclusion that “this time is different,” is faith in the Federal Reserve’s policy of quantitative easing. The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak...
Reforms are the only way to avoid systemic crisis, rebalance the economy, and unleash growth potential. Barclays notes that government, SOE, factor price and fiscal reform are most needed, though progress is likely to be faster on financial, tax and social security reform. Hopes are high, raising the risk of disappointment, but most think the government will try to meet expectations. History shows that economic growth tends to be lower after major third plenum meetings. This is because structural reforms, while good in the longer term, tend to slow growth in the near term. In advance of its release, the Development Research Center of the State Council, China’s official think tank, presented its own reform proposal – the so-called “383 plan” – which offers a glimpse of the direction that the reforms will take.
Asian economic growth (or lack thereof) is often seen as the bellwether to global growth. While the following heatmap (covering 10 Asian economies across 8 measures of macro-economic health) has its fair share of red (growth upswing) indications, as Bloomberg's Rob Subbaramam notes, a closer inspection reveals a theme on extremely uneven economic performance - and is expected to become more prominent. However, based on a GDP-weighted perspective the heatmap would signal cooling in aggregate for Asian growth.
With better US labor market data, the key event in the upcoming week could well be the Yellen nomination hearing in the Senate Banking Committee. Yellen will likely deliver brief prepared remarks followed by questions from members of the committee. Yellen is expected to be relatively circumspect in discussing potential future Federal Reserve policy decisions in the hearings. Nonetheless, the testimony may help clarify her views on monetary policy and the current state of the economy. Yellen has not spoken publicly on either of these topics since the spring of this year. In addition to the nomination hearing, there will be a series of Fed speeches again, including one by Chairman Bernanke.
Bond markets may be closed today for Veterans' Day, but equities and far more importantly, FX, are certainly open and thanks to yet another overnight ramp in the ES leading EURJPY, we have seen one more levitation session to start off the week, and an implied stock market open which will be another record high. There was little overnight developed market data to digest, with just Italian Industrial Production coming in line with expectations at 0.2%, while the bulk of the attention fell on China which over the weekend reported stronger Industrial Production and retail sales, while CPI was just below expectations and additionally China new loans of CNY 506 billion (below est. of CNY 580bn) even as M2 in line, should give the Chinese government the all clear to reform absolutely nothing. That all this goldilocks and goalseeked data is taking place just as the Third Plenum picks up pace was not lost on anyone.
This week an article in Euromoney points out that liquidity in bond markets is drying up. The blame is laid at the door of regulations designed to increase banks' capital relative to their balance sheets. Furthermore, the article informs us, new regulations restricting the gearing on repo transactions are likely to make things worse, not only reducing bond market liquidity further, but also affecting credit markets. The reason this will be so is that in a repurchase agreement a bank supplies credit to non-banks for the period of the repo. One could take another equally valid point of view: the reason for deteriorating liquidity in bond markets is due in part to yields being unnaturally low.
For almost two years (most recently this week), we have been vociferously explaining the dismal fact that "quantity" of jobs in this recovery is no match for dreadful "quality" of jobs as the "born-again jobs scam" contonues to roll on. Bloomberg's Matthew Klein has decided that nine pictures are better than a thousand words as he explains (in short sentences and simple charts) what the jobs report really means...
A dispassionate overview of the investment climate and what to expect this week.
In his parting act, Federal Reserve Chairman Ben Bernanke has decided to continue printing some $85 billion per month (6% of GDP per year) and spend those dollars on government bonds and, in the process, keep interest rates low, stimulate investment, and reduce unemployment. Trouble is, interest rates have generally been rising, investment remains very low, and unemployment remains very high. As Lawrence Kotlikoff points out, echoing our perhaps more vociferous discussions, Bernanke’s dangerous policy hasn’t worked and should be ended. Since 2007 the Fed has increased the economy's basic supply of money (the monetary base) by a factor of four! That's enough to sustain, over a relatively short period of time, a four-fold increase in prices. Having prices rise that much over even three years would spell hyperinflation.
"Debt matters... even if it is possible to pretend for many years that it doesn't," is the painful truth that, author of "Avoiding The Fall", Michael Pettis offers for the current state of most western economies. Specifically, Pettis points out that Japan never really wrote down all or even most of its investment misallocation of the 1980s and simply rolled it forward in the form of rising government debt. For a long time it was able to service this growing debt burden by keeping interest rates very low as a response to very slow growth and by effectively capitalizing interest payments, but, as Kyle Bass has previously warned, if Abenomics is 'successful', ironically, it will no longer be able to play this game. Unless Japan moves quickly to pay down debt, perhaps by privatizing government assets, Abenomics, in that case, will be derailed by its own success.
It wasn’t “disenchantment,” explained Euro Disney CEO Philippe Gas, but an “economic problem.”