CNBC’s long-running “jobs Friday” fetish is getting downright appalling. Each month the BLS puts out a treasure trove of data on the rich and complex mosaic of the US labor market - a download that embodies a truly frightening trend of economic failure. Yet the clowns who assemble in its screen boxes to opine on Hampton Pearson’s 30-second summary of the BLS release never have a clue. Namely, that outside of health and education there has not been one net new job created in the American economy since July 2000! Yes, not a single new jo - as in none, nein, nichts, nada, zip! The point here, however, is about economics, not social worth. And in the realm of economics, the notion implicit in “jobs Friday” - that all jobs are created equal - is simply a fatuous shibboleth.
At the end of the day, everything the Fed has done has been focused on propping up a broken system. Eventually the Fed’s efforts will fail at which point so will the Fed (just as the last two Central Banks in the US failed).
We believe independence terrifies some people because it requires a human being to challenge the unknown and take responsibility for the consequences if he fails. Followers trade in their mental and spiritual freedom to governments, oligarchs and gatekeepers so that they never have to face these difficulties. Sometimes, they are simply lazy. Sometimes, they lack confidence in their own abilities. Sometimes, they are just cowards. In any case, the result is the same: a life of relative ease riding the tides in a vast school of self-serving minnows but always prey to the ever circling sharks. We say don’t be a minnow; man-up, and build something of your own.
Although I never thought it was possible, it makes me angry to write this book review. I'm not angry because I don't like the book. On the contrary, this is the best economics book I've ever read. Indeed, it may be the best and most influential book I've ever read in my life. I only wish I had read it the moment it was published in April 2013.
I was looking at the entire history of the volatility index (the oft-cited "VIX') and found an interesting parallel.
How do we know when an asset class is in a bubble? When everyone who stands to benefit from the continuation of the expansion declares it can't be a bubble.
There rarely seems to be a “reason” for why market crashes happen. Market observers are e.g. debating to this day what actually “caused” the crash of 1987. It is in the nature of the beast that once liquidity evaporates sufficiently that not all bubble activities can be sustained at once any longer, bids begin to become scarce in one market segment after another. Eventually, they can disappear altogether – and sellers suddenly find they are selling into a vacuum. Once this happens, the usual sequence of margin calls and forced selling does the rest. Risk premiums normalize abruptly, and there doesn't need to be an obvious reason for this to happen. Compressed risk premiums can never be sustained “forever”.
The only three previous times when there was such a sharp contraction in the pace of San Fran home price appreciation, either the dot com bubble, the housing bubble, or the European sovereign debt bubble had just burst. For now, we leave what is going on in San Francisco as merely a question mark, because clearly the Fed's grand "reflation at all costs" experiment is nowhere near over...
That 4% market correction was quick and virtually painless. Not missing a beat after the market briefly tested 1900, the dip buyers came roaring back - gunning for the 2000 marker on the S&P 500, confident that longs were not selling and that shorts had long ago been obliterated. Needless to say, bubblevision had its banners ready to crawl triumphantly across the screen. When the algos finally did print the magic 2000 number, it represented a 200% gain from the March 2009 lows. And to complete the symmetry, the S&P 500 thereby clocked in at exactly 20X LTM reported earnings based on consistent historical pension accounting. The bulls said not to worry because the market is still “cheap” - like it always is, until it isn’t. To be sure, the Fed is a serial bubble machine. But even it cannot defy economic gravity indefinitely.
The disastrous blowback from inflating housing bubbles is painfully obvious: as housing becomes unaffordable, households impoverish themselves to "get in now before it's too late;" malinvestment (i.e. McMansions in the middle of nowhere) flourishes as housing becomes a speculative financial vehicle rather than shelter; retirement funds are sold designed-to-default mortgage-backed securities, and when the bubble finally pops, those lured into buying at the top are left underwater, owing more on their mortgage than their house is worth. But the euphoria and greed of the bubble mindset do serve one valuable purpose...
The arrogance, hubris and contempt for morality displayed by the ruling class is breathtaking to behold. They think they are untouchable and impervious to norms followed by the rest of society. They may have won the opening battle, but will lose the war. Discontent among the masses grows by the day. The critical thinking citizens are growing restless and angry. They are beginning to grasp the true enemy. The system has been captured by a few malevolent men. When the stock, bond and housing bubbles all implode simultaneously, all hell will break loose in this country. It will make Ferguson, Missouri look like a walk in the park.
The current 'boom'in energy production, the hangover from the housing bubble, and the long-term decline in manufacturing employment are combining to shift the employment profile of the US economy. But as Deloitte Unioversity press notes, the national story of slow recovery obscures the more complicated regional picture: As is the case during most business cycles, the pace of recovery has been very uneven among the states. At present, only 16 states plus the District of Columbia have employment rates at least one percent higher than they were prior to the start of the recession. Overall, as the following chart shows, Americans have been struggling to find work, but some states and industries have had an easier time than others.
Our impression is that today’s near-absence of risk premiums is both unintentional and poorly appreciated. We shudder at how much risk is being delivered – knowingly or not – to investors who plan to retire even a year from now. Barron’s published an article on target-term funds last month with this gem (italics mine): “JPMorgan's 2015 target-term fund has a 42% equity allocation, below that of its peers. Its fund holds emerging-market equity and debt, junk bonds, and commodities.” We don't believe that risk has been permanently removed from risky assets. The belief that it has is itself the greatest risk that investors face here.
The failure to understand money is shared by all nations and transcends politics and parties. The destructive monetary expansion undertaken during the Democratic administration of Barack Obama by then Federal Reserve chairman Ben Bernanke began in a Republican administration under Bernanke’s predecessor, Alan Greenspan. Republican Richard Nixon’s historic ending of the gold standard was a response to forces set in motion by the weak dollar policy of Democrat Lyndon Johnson. For more than 40 years, one policy mistake has followed the next. Each one has made things worse. What they don’t understand is that money does not “create” economic activity.
If you are getting a strong sense of déjà vu from current news flow, well, join the club. Everything feels so… familiar. And not necessarily in a good way. When we hear phrases like “Bubble markets”, “M&A cycle”, “historically low yields”, and “retail investor buying”, our minds automatically flash back to prior periods of history when those phrases last dominated the headlines. It isn’t hard to come up with a “Top 10” list of phrases with strong historical - and emotional - antecedents. So, today we did just that. Fair warning, however: just because a tune sounds familiar doesn’t mean you actually know the song. It could just be what the kids today call a “Sample” – a snippet of a song put in another song. Yep, what we’ve got here is something out of hip hop, not rock. Don’t especially like rap? Too bad, homey.