For the New Year, it seems that SOH, that last true refuge for pensive brooding bears, has been overrun with pompous bulls peddling & pumping a new 21st century high tech plateau of permanent prosperity, that would make even Irving Fisher's rose twittering cheeks blush. I wonder if old Irving would have Linked himself In or posted his rip roaring 20s rosy market views on a pretty pink Facebook page?
It is time to crank up the Looney Tunes theme song because Wall Street has officially entered crazytown territory. Stocks just keep going higher and higher, and at this point what is happening in the stock market does not bear any resemblance to what is going on in the overall economy whatsoever. So how long can this irrational state of affairs possibly continue? Stocks seem to go up no matter what happens. If there is good news, stocks go up. If there is bad news, stocks go up. If there is no news, stocks go up. On Thursday, the day after Christmas, the Dow was up another 122 points to another new all-time record high. In fact, the Dow has had an astonishing 50 record high closes this year. This reminds me of the kind of euphoria that we witnessed during the peak of the housing bubble. At the time, housing prices just kept going higher and higher and everyone rushed to buy before they were "priced out of the market". But we all know how that ended, and this stock market bubble is headed for a similar ending.
From the first headline to the last, the following brief month-by-month summary of the year shows just how far markets and global happenings have come...
Although the probability of any one of the predictions coming true is low, they are deduced strategically by Saxo Bank analysts based on a feasible - if unlikely - series of market and political events. As Saxo's chief economist notes, "This isn't meant to be a pessimistic outlook. This is about critical events that could lead to change - hopefully for the better. After all, looking back through history, all changes, good or bad, are made after moments of crisis after a comprehensive failure of the old way of doing things. As things are now, global wealth and income distribution remain hugely lopsided which also has to mean that significant change is more likely than ever due to unsustainable imbalances. 2014 could and should be the year in which a mandate for change not only becomes necessary, but is also implemented."
The financial crisis is surely a touchy subject at the Fed, where the biggest PR challenge is “bubble blowing” criticism from those of us who aren’t on the payroll (directly or indirectly). But Foote, Gerardi and Willen are, of course, on the payroll. They tell us there’s little else that can be said about the origins of the crisis, because any “honest economist” will admit to not understanding bubbles... " Unfortunately, the study of bubbles is too young to provide much guidance on this point. For now, we have no choice but to plead ignorance, and we believe that all honest economists should do the same." This smells to us like a strategy of gently acknowledging criticism (of the Fed’s interest rate policies), while at the same time attempting to neutralize it.
While the BLS may be searching far and wide for evidence of hedonically-adjusted "core" inflation, and not finding it anywhere (expect in assets, housing prices, food and energy, but apparently all America buys every day are LCD TVs and iPads), one place where not even the BLS can hide what is clear and present "inflation" is college grade point averages, and especially grades for humanities courses, where as the saying goes pretty much everyone is "above average." And, as JPM adds, "Soon, colleges will have to “turn the dial up to 11” or else everyone will have the maximum GPA." Well, in a society where the push is to make everyone equal, it would only be fair for everyone to get the exact same perfect grades...
Key events in the week ahead with implications for early 2014.
With even Bank of England head Mark Carney admitting UK housing prices may be a little bubbley (and affordability plumbing new depths), RT reports that a hostel in east London has come up with the ingenious idea, to try and solve homelessness amid soaring rents in the British capital, of converting a shipping container from China into a tiny low cost home for hard up and desperate Londoners. The boxes, called mYpads, cost GBP75 per week - around one-quarter of the rent of most distant yet commutable borough in London - and are affordable for even those on minimum wage.
“In 1960, about one in four renters paid more than 30% of income for housing. Today, one in two are cost burdened,” according to a new study (ironically) by Harvard University. As Bloomberg BusinessWeek's Peter Coy notes, the availability of apartments, especially cheaper ones, hasn’t nearly kept up with demand, and the problem has worsened since the 2007-09 recession. Remarkably, the number or people with severe cost burdens (paying over 50% of income to rent) is up by 2.5 million in just four years, to 11.3 million; and as usual, the pinch is hardest on the poor. The share of cost-burdened renters increased by a stunning 12 percentage points between 2000 and 2010, the largest jump in any decade dating back at least to 1960.
"The shale oil plays are going to be probably much less than a 10-year flash in the pan. They are very dependent on a lot of different things, including low interest rates and the ability to keep borrowing - which could turn around very quickly. Lower oil prices would tend to do the same thing. But even if you hypothesize that we can keep the low interest rates and that the oil price will stay up there, under the best of circumstances, the Barnett data says they probably will not go for very long... And so these companies put together optimistic financial statements that have the benefit of these extremely low interest rates. They keep adding debt onto debt onto debt. How long can they continue to get more debt to finance this whole operation? It's not a model that anybody who is very sensible would follow."
Faith in the current system is as high as it has ever been, and folks don't want to hear otherwise. If you're one of those people who thinks it prudent to have intelligent discussion on some of these risks -- that maybe the future may turn out to be less than 100% awesome in every dimension -- you're probably finding yourself standing alone at cocktail parties these days. A helpful question to ask yourself is: if I could talk to my 2009 self, what would s/he advise me to do? Don't put yourself in a position to relearn that lesson so soon after the last bubble. Exercise the wisdom to look like an idiot today.
China's GDP is about to undergo the same magic that US GDP received earlier in the year. The "Chinese system of National Accounts" will see five significant adjustments that are expected to (surprise) boost the size of the nation's estimate of its GDP. The National Bureau of Statistics is considering making the changes to reflect the latest economic and social developments and implement the reform guidelines unveiled at the 3rd Plenum recently. From the addition of research and development - intellectual properrty - (just as the US did) to including mark-to-market changes (read rises) in employee stock options and real estate in consumption data, the Chinese appear dead set on making a once-unbelievably goal-seeked number into an entirely fantastical representation of reality (which of course enables moar higher manipulation as to avoid any debt-to-gdp hurdles that the real world might see as a concern).
The soon-to-be-confirmed Mr. Chairwoman had plenty to say - none of which came as a great surprise. Overall we scored her comments 32 Dovish to 18 Hawkish (which fits with all pre-conceved ideas about the size of her index-finger in relation to the 'print' button). A few cherubs include:
- *YELLEN SAYS BENEFITS OF QE STILL EXCEED THE COSTS
- *YELLEN SAYS QE `CANNOT CONTINUE FOREVER'
- *YELLEN DOESN'T SEE ASSET BUBBLE IN HOUSING PRICES
- *YELLEN SAYS QE IS NOT AIMED AT HELPING TO FINANCE U.S. DEFICIT
- *YELLEN: NO ONE HAS A GOOD MODEL ON WHAT INFLUENCES GOLD PRICES
She covered fiscal policy, regulation, gold, income inequality, and bubbles; but it was her admission late in the Q&A that "real" unemployment is around 10% that perhaps leaves the most room for moar...
Ben Bernanke is participating in an IMF panel with Larry Summers, Ken Rogoff, and fromer Bank of Israel chief Stan Fischer... Full speech below...
Yes... a rating agency - the same entity that enabled the last housing market crash - just warned of a housing bubble. How the times have changed - maybe it is different this time?