The level of governmental and corporate corruption, chronic unemployment, rising food and medical costs and the escalating taking of rights and freedoms are not unseen by the population at large, just desperately ignored.
I am sure those who were buying the "Kool-aid" at the market highs feel that way, but the numbers tell a different story.
The evil of modern central banking can nowhere better be seen than in this week’s mad stampede into $4 billion of Greek bonds. The fact is, Greece is not credit-worthy at nearly any coupon yield, but most certainly not at the 4.75% sticker that was attached to the offering. And the claim that Greece’s fiscal affairs have turned for the better is really preposterous. But none of this matters, of course, because the howling pack of money managers who scooped up the Greek debt at an oversubscribed rate of 5X were not pricing the non-credit of the former Greek state, but the promises of Mario Draghi. The very worst evil of monetary central planning is that it enables clueless politicians to believe in their own fiscal fairy tales, and to persist in the ritual can-kicking that is the scourge of central bank intoxicated politicians everywhere. In the context of its shattered economy, the Greek budget is a house of cards. Still, its current leaders, whose tenure is precarious by the day, get their turn in the spotlight to issue utterly specious pettifoggery...
The world’s official economic institutions are run by people who believe in monetary fairy tales. The 70 words of wisdom below from IMF head Christine Lagarde are par for the course. She asserts that a new jabberwocky expression called “low-flation” is the main obstacle to higher economic growth in Europe and the DM areas generally and that it can be cured by more central bank money printing.
But at the end of the day, if your creditors lost faith in your ability to repay it… it’s GAME OVER. This is hitting the emerging market space today.
If we break below these... LOOK OUT BELOW.
Most economic observers are predicting that 2014 will be the year in which the United States finally shrugs off the persistent malaise of the Great Recession. In contrast, we believe that the episode has, for the moment, established supreme confidence in the powers of monetary policy to keep the economy afloat and to keep a floor under asset prices, even in the worst of circumstances. The shift in sentiment can only be explained by the growing acceptance of monetary policy as the magic elixir that Keynesians have always claimed it to be. This blind faith has prevented investors from seeing the obvious economic crises that may lay ahead. Based on nothing but pure optimism, the market believes that the Fed can somehow contract its $4 trillion balance sheet without pushing up rates to the point where asset prices are threatened, or where debt service costs become too big a burden for debtors to bear. The more likely truth is that this widespread mistake will allow us to drift into the next crisis.
While some would argue (as they always do) that there are good reasons to be bullish going into 2014 (central bank liquidity provision being an obvious one); there are ample reasons to remain vigilant with respect to your investments. The stagnation of wage growth combined with higher costs leaves an already cash strapped consumer with few options. It is likely that we will see a push by consumers to re-leverage their household balance sheet which will be hailed by the media as a return of consumer confidence. However, one should not forget the last time a highly levered consumer ran into problems. Furthermore, there are three potential headwinds that are likely to weigh on the economy and the markets which are potentially being overlooked.
While the generic overnight futures meltup is present this morning, it is nothing compared to what the epic surge in the EURJPY early in the overnight session suggested it would be, and in fact the levitation in US equities driven as usual by Yen carry trades (just what is the P/E or PEG on the USDJPY, or the EURUSD for that matter?) is far more muted than seen in recent days. The main reason for the easing of the carry-risk signal pair is the increasing confusion over what may happen next week when increasingly more are convinced Bernanke will announce a Taper, and since everyone remembers the summer very vividly, the last thing anyone wants is to be the last Kool-aid drinker at the centrally-planned party.
Thanks to the "pulling forward" of future production in the channel-stuffing-based inventory build of Q3, consensus estimates for the growth of the US GDP in Q4 2013 has collapsed to new lows for this cycle at a mere 1.5%. However, the "escape-velocity" recovery remains just around the corner as estimates for Q1 and Q2 2014 remain unimpacted by such nuance as reality...
Technically, "High Yield" is no longer the appropriate name for the riskiest credit issuance since the average coupon has declined to where Investment Grade used to trade in the years before the New Normal. It is therefore only appropriate that as part and parcel of this record high yield bond issuance surge levering the riskiest companies to the gills with low interest debt, that there is also a scramble between underwriters to become as competitive as possible. And, sure enough, as Bloomberg Brief reports, "the underwriting fees disclosed to Bloomberg on U.S. junk bond deals average 1.276 percent for the year to date, the lowest since our records began. The prior low was set in 2008, when fees averaged 1.4 percent." 2008... that was when the last credit bubble burst on unprecedented demand for junk bonds: we are confident the bubble apologists will find some other metric with which to convince everyone that reality, and the Fed's Stein, have it all wrong.
"It's only a question of time before the central banks lose control," David Stockman warns a shocked CNBC anchor, "and a panic sets in when people realize that these values are massively overstated." The outspoken author of The Great Deformation rages "the Fed is exporting its lunatic policies worldwide." If one cares to look, Stockman adds, "there are bubbles everywhere," citing Russell 2000 valuations of 75x LTM earnings as an example, "that makes no sense. It's up 43% in the last year, but earnings of the Russell 2000 companies have not increased at all." This is dangerous, he strongly cautions, "I haven't seen too many bubbles in history" that haven't ended violently.
SSDD. Collapsing confidence, check. Housing Recovery meme toast, check. Volume at 2013 lows, check. BTFATH and send Trannies up for 13th of last 15 days (+10.4%), Dow near all-time highs again (thank you IBM buybacks), and S&P to new all-time highs... but don't tell Treasuries (which stand +/-1bps on the week). VIX wasn't drinking the kool-aid but the NASDARK session enabled futures to drag us back to higher before limping lower into the closer. The USD oscilatted around Nowotny comments and POMO ending the day up a rather notable 0.5% from Friday's close and that pressured commodities in general lower (gold hovering at $1345). Credit, Treasuries, VIX, and volume are all diverging from equity exuberance. The last 2 minutes saw stocks scream higher on their own as the world was terrified it would miss out on something (but no other market moved) and all the major indices managed new highs.
If you’re anything like us, you may have reached the conclusions that:
- Our elected officials are charting a course to a fiscal disaster.
- The Fed is repeating past mistakes by setting us up for another bust.
After the drama of the debt ceiling debate and the Fed’s non-tapering surprise, we see no reason to doubt these views. But the latest developments got us thinking, and we have an unusual proposal.
Once the economy's capital structure is distorted beyond a certain threshold, it won't matter anymore how much more monetary pumping the central bank engages in – instead of creating a temporary illusion of prosperity, the negative effects of the policy will begin to predominate almost immediately. Given that we have evidence that the distortion is already at quite a 'ripe' stage, it should be expected that the economy will perform far worse in the near to medium term than was hitherto widely believed. This also means that monetary pumping will likely continue at full blast, as central bankers continue to erroneously assume that the policy is 'helping' the economy to recover.