"Debt matters... even if it is possible to pretend for many years that it doesn't," is the painful truth that, author of "Avoiding The Fall", Michael Pettis offers for the current state of most western economies. Specifically, Pettis points out that Japan never really wrote down all or even most of its investment misallocation of the 1980s and simply rolled it forward in the form of rising government debt. For a long time it was able to service this growing debt burden by keeping interest rates very low as a response to very slow growth and by effectively capitalizing interest payments, but, as Kyle Bass has previously warned, if Abenomics is 'successful', ironically, it will no longer be able to play this game. Unless Japan moves quickly to pay down debt, perhaps by privatizing government assets, Abenomics, in that case, will be derailed by its own success.
Despite what the talking heads continue to spew to justify all-time high stock market valuations, the 'fact' is that year-to-date, US Macro data has now performed the worst of all global macro indices. Furthermore, the pace of collapse in the last 4-weeks is the fastest in 8 months. What is perhaps most ironic is that US Macro peaked at the last FOMC meeting (when the Fed decided that data was not supportive enough to Taper) so any surprise today simply supports the fact that the Fed's decision is anything but fundamentally driven (and instead perhaps driven by the four 'bad' reasons for a tapering.)
Having previously exposed the world to the "nominal stock market cheerleaders," it is clear that Kyle Bass sees things as only having got worse among developed nations. In fact, the following interview shows that he does not fear US losing its credibility since "developed western economies with the largest debt loads are all in the same boat." The discussion expands from the debt ceiling debacle to bonds and stocks, "given the lack of nominal yield in the bond market, all of the new money is going to continue into stocks. The interesting thing is it’s going to make the rich people richer and the middle and lower class won’t be any better off, which is the opposite of what the administration is trying to pull off," adding that being in stocks "is not your choice," thanks to Fed repression and that deficit contraction is all that can stop the Fed now.
"If the politicians lead us into a 'prioritization of payments' situation for Treasury Secretary Lew or an actual missed payment, there is nothing you can do to protect yourself from that!" are the ominous words that Kyle Bass uses to describe the farce that is rapidly approaching (and for now being ignored by stocks). Bass went on to pull no punches in his "disappointment" in JCPenney's performance (and dilution) coming as close as he can to saying "sell." But his piece de resistance was a dismal destruction of any silver lining for Puerto Rico and the significant implications that will have on Muni bonds in general.
"Has J.C. Penney (JCP) bottomed? How many times have I heard that one? It has to be the most asked question now that we are seeing some of the highest quality hedge funds in the situation, including Perry Capital (run by my old friend Rich Perry) as well as Glenview Capital and Kyle Bass. Suffice it to say that I don't think there could be many investors as wise as these people. They aren't approaching the situation idly and I think they are going to be right. To me, that's a lot of ways to get the stock to $18.... Can this stock go up $5 on a new CEO and a better holiday season? Yes. And that's why it is worth joining these great hedge funds. Not because they are in it. But because the time and the price are right. You don't need to know anything else for the moment."
- Jim Cramer, September 5, 2013
A few years back Chairman Bernanke was asked by a financial reporter how confident he was that the Fed could easily start the process of withdrawing from the accommodation of “unorthodox” monetary policy. Some might argue (ourselves included) that the answer 'should' be something like “very confident” or “We feel we have the right tools and the right people to manage that process”. Instead the answer given was “100%”. At last week's press conference, Chairman Bernanke, in CitiFX Technicals' view, looked like the “cat that got the cheese", despite the more downbeat message he was giving? Why? Because he got his way. In their “conspiracy theory” interpretation it is likely that Janet Yellen’s nomination will indeed be announced in the near future and that tapering is now firmly back off the table despite the guidance given in recent months to the contrary. Bonds seem to agree (so far).
With the FOMC set to announce the decision to taper or not taper, forward guide or not forward guide, cut thresholds or not cut thresholds, we thought a reminder of the seven reasons to delay the taper (following what BAML's Ethan Harris calls the recent "punch in the stomach for the economic recovery story") and the four crucial reasons why the Fed can't (or won't) delay the Taper.
For the right answer, we look to the past....
"I estimate the US fiscal gap at US$200 tn, 17 times the reported US$12 tn in official debt in the hands of the public.... Our country is broke. It’s not broke in 50 years or 30 years or 10 years. It’s broke today. Six decades of take as you go has led us to a precipice. That’s why almost the entire economics profession is talking as one at www.theinformact.org. Economists from all political persuasions are collectively sending our government a warning about what is, effectively, a nuclear economic bomb. I’ve been around economics for a long time. I’ve never seen such a strong response to a proposed Congressional bill. This is the profession sending a statement to the President and Congress that’s not unlike the warning physicists sent via Einstein to Roosevelt about the bomb." Larry Kotlikoff
Japanese finances are in a shambles and very soon investors are going to run screaming from the Yen and JGB markets.
In spite of the prime-dealers seeming agreement that SepTaper is most likely; judging by the plethora of talking-heads and research pieces hitting in the last few days, the idea that a Taper was a good thing (Tepper) and in fact indicates 'health' appears to be on the back-burner as almost every sell-side shop is out with a discussion of just how potentially bad things are macro-economically and that a taper should be off the table. Below is BofAML's Ethan Harris' seven reasons to delay the taper following today's "punch in the stomach for the economic recovery story" (and our 4 reasons why they can't or won't).
One of the most published academics on gold in the world is Dr Brian Lucey of Trinity College Dublin (TCD) and he and another academic who has frequently covered the gold market, Dr Constantin Gurdgiev have just this week had an excellent research paper on gold published.
They have researched the gold market, along with Dr Cetin Ciner of the University of North Carolina and their paper, ‘Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates’ finds that gold is a hedge against US dollar and British pound risk due to “its monetary asset role.”
- So no great rotation into EM? Capital Flows Back to U.S. as Markets Slump Across Asia (BBG)
- Muslim Brotherhood leader arrested in Egypt (Reuters)
- Allies Thwart America in Egypt: Israel, Saudis and U.A.E. Support Military Moves (WSJ)
- Dear Bloomberg: when you buy the loans of a distressed retailer, you are not betting on a rebound, you are betting on being the fulcrum security in a bankruptcy: Kyle Bass Said to Bet on J.C. Penney Comeback With Loan Purchase (BBG)
- Bubbles Bloom Anew in Desert as Buyers Wager on Las Vegas (BBG)
- Britain rejects Spanish request for Gibraltar talks (Reuters)
- U.K. Mortgage Lending Rises to Highest Since Lehman Collapse (BBG)
- Pension Funds Dispute Math in Detroit Bankruptcy (WSJ)
- Christie Says Gayness Inborn as He Signs Therapy Measure (BBG)
The Fed’s Confession: We Can Avoid A Crash At The End Of QE If Everybody Believes That Everybody Believes In A Mirage....Submitted by testosteronepit on 08/14/2013 12:33 -0400
With impeccable timing.
With revenues fading, profit margins collapsing, and only financial institutions' entire lack of transparency providing any lift in EPS, the 'great rotation' continues to provide enough cognitive dissonance to sink a boat for the asset-gatherers. The trouble, as we showed previously, is this 'rotation' is dominated by US retail investors (more specifically non-US domiciled and non-retail investors are rotating away from US equities). The US retail investor has shifted in a great-rotationary manner by the greatest amount since Feb 2000 - just as the last great bubble burst. US equities are the 3rd most over-crowded speculative long asset in the world after Crude Oil and the Brazilian Real. It seems the Fed is getting just what it wants but, just as Kyle Bass warned, "investors should be really careful doing what the central bankers want them to do."