Irrational Exuberance

The political class set in motion the eventual obliteration of our economic system with the creation of the Federal Reserve in 1913. Placing the fate of the American people in the hands of a powerful cabal of unaccountable greedy wealthy elitist bankers was destined to lead to poverty for the many, riches for the connected crony capitalists, debasement of the currency, endless war, and ultimately the decline and fall of an empire. The 100 year downward spiral began gradually but has picked up steam in the last sixteen years, as the exponential growth model, built upon ever increasing levels of debt and an ever increasing supply of cheap oil, has proven to be unsustainable and unstable. Those in power are frantically using every tool at their disposal to convince Boobus Americanus they have everything under control and the system is operating normally. Nothing could be further from the truth.

In 1996 it was Alan Greenspan with his "irrational exuberance" call, is Janet Yellen sending the same message, as she warns...

• *YELLEN SEES SIGNS `SOME PARTIES ARE REACHING FOR YIELD'
• *YELLEN SAYS LOW INTEREST RATES MAY PROMPT `TOO MUCH LEVERAGE'

Did the Fed's most dovish member, and likely next chairperson just suggest that, while 'lower for longer' rates will continue, that stocks and high-yield credit look a little more than frothy.

While budgets are thrown around that tax wealth in every way possible and transfer payments are ever-increasing, it seems the post-election euphoria among the poor in the USA has worn off just as rapidly as it did in 2008. Bernanke's irrational exuberance has pushed the 'comfort' of the 'rich' (earning over $100k) to its highest since October 2010 while the comfort of the 'poor' (those earning under $15k per year) has slumped back to the lowest comfort in three months. We need moar wealth transfer.

Sam Zell: "This is a very treacherous market," thanks to the giant tsunami of liquidity, "the problems of 2007 haven't been dealt with," and given the poor macro data and earnings, "we are suffering through another irrational exuberance," leaving the entire CNBC audience speechless when he concludes, "the stock market feels like the housing market of 2006." 

We live in a world that is dislocated, on a different axis, where the economy is doing one thing and the markets are doing something else that is not connected. As political nonsense becomes the world's normal banter; the official language in the Press is little more than printed or spoken noise - all caused by the Fed's outpouring of money into the system. Rational reactions become irrational when confined to an irrational world. The world will return to its senses once again either driven by some "event" or by the Fed beginning some sort of withdrawal. In the meantime the markets are beginning to back-up some as moved by becoming accustomed to the continuing flood of money. It is rather like a fine Bordeaux. One meal, two meals, a week's worth of meals and the experience is marvelous but if you drink it every night for dinner the magic begins to dissipate. It is no longer special; it is something expected, it is just the normal fare.

The overtly inflationary policy stance of the FOMC is especially significant when you consider that Fed Chairman Ben Bernanke is no longer in control of monetary policy.

Physical gold and silver demand remains robust in many markets internationally. Demand from the Middle East remains robust as seen in the near record imports of gold and silver into Turkey. Turkey’s gold imports climbed to an eight-month high in March as prices averaged the lowest since May, according to the Istanbul Gold Exchange. Silver imports rose 31% from a month earlier according to Bloomberg. Gold imports increased to 18.26 metric tons, the most since July. That’s up from 17.34 tons in February and compared with 2.91 tons a year earlier, data on the exchange’s website show. The country shipped in 120.8 tons last year. Turkey was the fourth-biggest gold consumer in 2012, according to the London-based World Gold Council. Bullion averaged $1,593.62 an ounce last month and is trading about 17% below the record nominal high of $1,921.15 set in September 2011.

Barclays index of high yield bond total returns is now 63% higher that its pre-crisis peak. This compares to an equivalent total return index for the S&P 500 was only 12% (and it has yet to break the October 2007 highs). These numbers are astronomical in the face of micro- and macro-fundamentals and while equity markets remain the policy tool du jour for the central planning elite, it appears they are perhaps starting to become a little concerned that driving all the retiring boomers 'safe' money into risky bets may not end so well. Just as Alan Greenspan stepped on the throat of equity markets with his now infamous 'irrational exuberance' speech, we wonder, as Bloomberg notes, if last night's speech to the Economic Club of New York by Bill Dudley is the new normal equivalent, as he noted, "some areas of fixed income - notably high-yield and leveraged loans - do seem somewhat frothy," just as we warned here. With the high-yield index trading at 5.56% yield - the lowest in over 25 years and loans bid at 98.27 (the highest since July 2007), perhaps he is right to note, "we will need to keep a close eye on financial asset prices."

Events in Cyprus stem from precisely the same source as the surge in US home prices, namely monetary expansion by the Fed.  

Farcebook does not have a credible advertising model & any Facebook analyst/pundit who valued FB without trying the platform isn't worth the postage to mail his bonus check...

There once was a time when it was fair to say that Alan Greenspan was the biggest living contrary indicator of all time. Long before he became known to a wider audience, in early January of 1973, he famously pronounced (paraphrasing) that 'there is no reason to be anything but bullish now'. The stock market topped out two days later and subsequently suffered what was then its biggest collapse since the 1929-1932 bear market. That was a first hint that stock market traders should pay heed to the mutterings of the later Fed chairman when they concerned market forecasts: whatever he says, make sure you do the exact opposite. The reason why we feel he must be relegated to third place is that since then, arguably two even bigger living contrary indicators have entered the scene: Ben 'the sub-prime crisis is well contained' Bernanke, and Olli 'the euro crisis is over' Rehn. Admittedly it is not yet certain who will be judged the most reliable of them by history, but in any case, when Greenspan speaks, we should definitely still pay heed...

Despite the all-knowing Alan Greenspan confirming there is no irrational exuberance currently, Oaktree Capital's Howard Marks is less convinced. Though he is not bearish, he lays out rather succinctly the current pros and cons for equities - based on the various 'valuation' arguments, discusses the folly of the equity risk premia, and highlights the dangers of extrapolation and what history can teach us... "appreciation at a rate in excess of the cash flow growth accelerates into the present some appreciation that otherwise might have happened in the future... it isn't just a windfall but also a warning sign."

The underlying question in Bill Gross' latest monthly letter, built around Jeremy Stein's (in)famous speech earlier this month, is the following: "How do we know when irrational exuberance has unduly escalated asset values?" He then proceeds to provide a very politically correct answer, which is to be expected for the manager of the world's largest bond fund. Our answer is simpler: We know there is an irrational exuberance asset bubble, because the Fed is still in existence. Far simpler.

It is hard to find a policymaker who hasn’t actively tried to talk his currency down. The few who don’t talk, act as if they were intent on driving their currency lower.  Citi's Steven Englander argues below that the ‘currency wars’ impact is collective monetary/liquidity easing. Collective easing is not neutral for currencies, the USD and JPY tend to fall when risk appetite grows while other currencies appreciate. Moreover, despite the rhetoric on intervention, we think that direct or indirect intervention is credible only in countries where domestic asset prices are undervalued and CPI/asset price inflation are not issues. In other countries, intervention can boost domestic asset prices and borrowing and create more medium-term economic and asset price risk than conventional currency overvaluation would. So the MoF/BoJ may be credible in their intervention, but countries whose economies and asset markets are performing more favorably have much more to lose from losing control of asset markets. So JPY and, eventually CHF, are likely to fall, but if the RBA or BoC were to engage in active intervention they may find themselves quickly facing unfavorable domestic asset market dynamics.

Gold dropped $8.20 or 0.49% in New York on Friday and closed at $1,656.30/oz. Silver slipped to as low as $29.22 in London, but it then rallied to as high as $30.25 in New York and finished with a gain of 0.2%. Gold finished down 0.05% for the week, while silver was up 0.53%.

Friday’s U.S. nonfarm payrolls for December were 155K, 150K was expected and this was down from the previous data of 161K. The unemployment rate was still an elevated 7.8% suggesting a frail U.S. jobs market.