Said Dr. El-Erian: “I have been extremely honored and fortunate to work alongside Bill Gross, who is one of the very best investors in the world. His talents are truly exceptional, as is his dedication. I have also been amazingly privileged to work with the most talented group of professionals in the investment management industry. Their commitment and tireless work on behalf of our clients have been a consistent inspiration for me since I first joined PIMCO back in 1999. I wish them continued great success.”
"The latest review shows how the seeds of the current divergence were already sown in the early years of the euro, as unbalanced growth in some Member States, based on accumulating debt fuelled by low interest rates and strong capital inflows, was often associated with disappointing productivity developments and competitiveness issues. In the absence of the currency devaluation option, euro area countries attempting to regain cost competitiveness have to rely on internal devaluation (wage and price containment). This policy, however, has its limitations and downsides not least in terms of increased unemployment and social hardship, and its effectiveness depends on many factors such as the openness of the economy, the strength of external demand, and the presence of policies and investments enhancing non-cost competitiveness." - European Commission
Overview of the major forces shaping the investment climate.
"I happen to think that 2014 is a VERY different year than 2013 from a variety of viewpoints. First, there appears to be a dispersion of opinion about markets, valuations, policy frameworks and more. This is a healthy departure from YEARS of artificiality. Artificiality in valuations, artificiality in market and policy mechanics and essentially artificiality in EVERY financial, and real, relationship on the planet based on central bank(s) balance sheet expansion and other measures intended to be a stop-gap resolution to tightening financial conditions, adverse expectations of economic activity, and the great rollover" - Russ Certo, Brean Capital
Following December's biggest-surge-in-4-years for UMich consumer confidence (though a miss), UMich data has fallen back to 80.4 - missing expectations by the biggest margin in 8 years. This is the 4th miss in the last 5 months as hope for moar multiple expansion begins to fade. Both current conditions and the outlook indices fell (for the first time sicne October). As UPS would says, confidence dropped because there was too much confidence...
Nature is full of unpleasant parasites which cause their hosts to engage in irrational, destructive, or even suicidal behavior. Of course, they exist for humans too... especially for investors. In fact probably the number one parasite which affects investors is a very peculiar emotion: fear. Specifically, it’s the fear of missing out that drives so much irrational investment behavior. Nobody wants to miss a big boom, no matter how baseless the fundamentals. Ironically, this fear of missing out is stronger than the fear of loss. Following the crowd is a great way to lose a lot of money.
Americans have never had less economic freedom than they do right now. The 2014 Index of Economic Freedom has just been released, and it turns out that the level of economic freedom in the United States has now fallen for seven consecutive years. But of course none of us need a report or a survey to tell us that. All we have to do is open our eyes and look around. At this point our entire society is completely dominated by control freaks and bureaucrats. Our economy is literally being suffocated to death by millions of laws, rules and regulations and each year brings a fresh tsunami of red tape. As you will see below, the U.S. government issued more than 80,000 pages of brand new rules and regulations last year on top of what we already had. Even if we didn't have all of the other monumental economic problems that we are currently facing, all of this bureaucracy alone would be enough to kill our economy.
Day two of the bounce from the biggest market drop in months is here, driven once again by weak carry currencies, with the USDJPY creeping up as high as 104.50 overnight before retracing some of the gains, and of course, the virtually non-existant volume. Whatever the reason don't look now but market all time highs are just around the corner, and the Nasdaq is back to 14 year highs. Stocks traded higher since the get-go in Europe, with financials leading the move higher following reports that European banks will not be required in upcoming stress tests to adjust their sovereign debt holdings to maturity to reflect current values. As a result, peripheral bond yield spreads tightened, also benefiting from good demand for 5y EFSF syndication, where price guidance tightened to MS+7bps from initial MS+9bps. Also of note, Burberry shares in London gained over 6% and advanced to its highest level since July, after the company posted better than expected sales data. Nevertheless, the FTSE-100 index underperformed its peers, with several large cap stocks trading ex-dividend today. Going forward, market participants will get to digest the release of the latest Empire Manufacturing report, PPI and DoE data, as well as earnings by Bank of America.
As global central bankers appear set on a game of inter-continental reach-around, the Japanese - printing press handle in hand - have taken the lead. For those wondering why EURJPY is so high and why, despite an endless stream of disappointingly near-record-bad macro and micro data in Spain and Italy, yields are near record lows... wonder no more. As Reuters' Jamie McGeever reports, the Japanese bought Spanish and Italian government debt at the fastest pace in 5 years. As Abe increases his militaristic presence in Asia, perhaps his 'promise' to buy any and all European peripheral debt is just the handshake he needs to pressure China (through its largest export market).
After last week's economic fireworks, this one will be far more quiet with earnings dominating investors' attention: US financials reporting this week include JPM and Wells Fargo tomorrow, BofA on Wednesday, GS and Citi on Thursday, BoNY and MS on Friday. Industrial bellwethers Intel (Thurs) and General Electric (Fri) are also on this week’s earnings docket. On the macro front, this coming week we have two MPC meetings - both in LatAm. For Brazil consensus expects a 25bps hike in the policy rate. For Chile consensus forecasts monetary policy to remain on hold. Among the data releases, one should point out inflation numbers from the US (CPI and PPI), Eurozone, the UK and India. We also have three important US producer and consumer surveys - Empire Manufacturing, Philadelphia Fed (consensus +8.5), and U. of Michigan (consensus 83.5). Among external trade and capital flow stats, we would emphasize US TIC data, as well as current account balances from Japan and Turkey. Finally, the accumulation of FX reserves in China is interesting to track as it provides an indication of CNY appreciation pressure.
If you are anxiously awaiting the arrival of the "economic collapse", just open up your eyes and look at what is happening in Europe. The entire continent is a giant economic mess right now. Unemployment and poverty levels are setting record highs, car sales are setting record lows, and there is an ocean of bad loans and red ink everywhere you look. Over the past several years, most of the attention has been on the economic struggles of Greece, Spain and Portugal and without a doubt things continue to get even worse in those nations. But in 2014 and 2015, Italy and France will start to take center stage. France has the 5th largest economy on the planet, and Italy has the 9th largest economy on the planet, and at this point both of those economies are rapidly falling to pieces. Expect both France and Italy to make major headlines throughout the rest of 2014. The following are just a few of the statistics that show that an "economic collapse" is happening in Europe right now...
If one listens to Goldman's chief economist Jan Hatzius these days, it is all roses for the global economy in 2014... much like it was for Goldman at the end of 2010, a case of optimism which went stupendously wrong. Goldman's Dominic Wilson admits as much in a brand new note in which he says, "Our economic and market views for 2014 are quite upbeat." However, unlike the blind faith Goldman had in a recovery that was promptly dashed, this time it is hedging, and as a result has just released the following not titled "Where we worry: Risks to our outlook", where Wilson notes: "After significant equity gains in 2013 and with more of a consensus that US growth will improve, it is important to think about the risks to that view. There are two main ways in which our market outlook could be wrong. The first is that our economic forecasts could be wrong. The second is that our economic forecasts could be right but our view of the market implications of those forecasts could be wrong. We highlight five key risks on each front here." In short: these are the ten things that keep Goldman up at night: the following five economic risks, and five market view risks.
No surprises here: hours after we reported that youth unemployment in Spain soared to fresh record highs (surpassing the already nosebleeding number of jobless people under 25 in Greece), here comes Gallup with a poll showing the approval rating of the (unelected) EU Leadership across the peripheral countries. And while there was a slight uptick in approval among respondents in Italy - the country that has so far benefited the most from the Italian central banker at the helm of the ECB - the EU's lack of approval just rose to all time highs in the two countries that continue to see their youth employment hopes crushed by the European experiment, with approval in Spain sliding to 27% (from 55% in 2010), while Greece, plunged to only 19%, which makes one wonder: just who has an interest in keeping Greece in Europe?
"Paper and digital markets levitate, central banks pull out all the stops of their magical reality-tweaking machine to manipulate everything, accounting fraud pervades public and private enterprise, everything is mis-priced, all official statistics are lies of one kind or another, the regulating authorities sit on their hands, lost in raptures of online pornography (or dreams of future employment at Goldman Sachs), the news media sprinkles wishful-thinking propaganda about a mythical “recovery” and the “shale gas miracle” on a credulous public desperate to believe, the routine swindles of medicine get more cruel and blatant each month, a tiny cohort of financial vampire squids suck in all the nominal wealth of society, and everybody else is left whirling down the drain of posterity in a vortex of diminishing returns and scuttled expectations."
Unstable eurozone states are particularly vulnerable to default because they no longer have their own sovereign currencies, putting them in a similar position as emerging countries that borrowed in U.S. dollars in the 1980s and 1990s.