Donald Trump’s patented phrase “we aren’t winning anymore” lies beneath the tidal wave of anti-establishment sentiment propelling his campaign and, to some considerable degree, that of Bernie Sanders, too. What’s winning is Washington, Wall Street and the bicoastal elites. But most of America’s vast flyover zone has been left behind. Thus, the bottom 90% of families have no more real net worth today than they had 30 years ago and earn lower real household incomes and wages than they did 25 years ago. Needless to say, the lack of good jobs lies at the bottom of the wealth and income drought on main street, and this week’s April jobs report provided still another reminder.
The following exercise in truth-seeking is intended to inoculate you from the Big Narrative Lie coming soon to a status quo media megaphone near you, that this resurgence in risk assets is caused by a resurgence in fundamental real-world economic factors. We know you want to believe this is true. It’s unpleasant, 8 years after the crisis, to accept the reality that we are mired in a policy-controlled market.
BofAML's Mike Cantopoulos' distaste for corporate fundamentals, displeasure with the efficacy of QE and easy monetary policy on spurring growth and inflation, and concerns that a further deterioration in credit conditions will create deeper economic troubles not appreciated by many have left credit markets with poor default adjusted valuations and little room to absorb a negative shock. He highlights nine key reasons below why BofAML believes this rally won't last (and in fact may have already seen its end).
In what may be one of the least relevant payroll reports in a long time as the Fed already knows the labor market is doing better quantiatively (qualitatively it has been all about low-paying jobs gaining at the expense of higher paying manufacturing and info-tech positions) and as has further demonstrated it is no longer jobs data dependent, here is what Wall Street consensus expects: total payrolls +200,000, down from 215K in March; a 4.9% unemployment rate; average hourly earnings rising 0.3% (last 0.3%) M/M and 2.4% Y/Y (last 2.3%); on labor force participation of 63%.
Does the deployment of helicopter money not entail some meaningful risk of the loss of confidence in a currency that is, after all, undefined, uncollateralized and infinitely replicable at exactly zero cost? Might trust be shattered by the visible act of infusing the government with invisible monetary pixels and by the subsequent exchange of those images for real goods and services? To us, it is the great question. Pondering it, as we say, we are bearish on the money of overextended governments. We are bullish on the alternatives enumerated in the Periodic table. It would be nice to know when the rest of the world will come around to the gold-friendly view that central bankers have lost their marbles. We have no such timetable. The road to confetti is long and winding.
Despite the recent comparisons, Donald Trump and Ronald Reagan are very different when it comes to experience and views on fiscal policy.
Could a cash ban and carry tax be coming to the US?
While markets remain relatively subdued ahead of tomorrow's nonfarm payrolls report, after several days of losses in US stocks which pushed the S&P500 to three week lows, overnight markets ignored the latest weak data out of China where the Caixin Services PMI was the latest indicator to disappoint (dropping from 52.2 to 51.8), and instead focused on crude, which rebounded from yesterday's post inventory-build lows and briefly printed above $45/bbl over uncertainty related to the impact of Canada wildfires on production and how long will last. The bounce in WTI has meant Brent briefly traded at parity with West Texas for the first time in 6 weeks.
"Money for free! Well not exactly. The Piper that has to be paid will likely be paid for in the form of higher inflation, but that of course is what the central banks claim they want. What they don’t want is to be messed with and to become a government agency by proxy, but that may just be the price they will pay for a civilized society that is quickly becoming less civilized due to robotization. There is a rude end to flying helicopters, but the alternative is an immediate visit to austerity rehab and an extended recession. I suspect politicians and central bankers will choose to fly, instead of die."
The central bank war on savers is rooted in a monumental case of the Big Lie. Here is what a retired worker who managed to save $5,000 per year over a 40 year’s lifetime of toil and sweat in a steel factory now earns in daily interest on a bank CD. To wit, a single cup of cappuccino. Yet the central bankers claim they have absolutely nothing to do with this flaming economic injustice.
Despite a very modest beat of expectations US worker productivity fell for the 2nd quarter in a row (down 1.0% vs 1.3% QoQ), the two-quarter-average output per hour isdown 1.4% - the worst slump since 1993. Unit labor costs rose by a better than expected 4.1% (helped by a downwardly revised 2.7% rise in Q4), the highest since Q4 2014.
We've now seen three consecutive quarters of net tightening of C&I lending standards in the US (Figure 1, left) and previously whenever this has happened it has ultimately led to a full blown default cycle – albeit with only three cycles of data to examine. The series does tend to exhibit sweeping cyclical tendencies with momentum and is not prone to random fluctuations. So it's a worry that we've entered the net tighten stage and have stayed there for three quarters now.
After three years of the dollar being pretty much the only strong currency in the world, US corporate profits are falling (because it’s hard to sell things abroad when you price them in an expensive currency) and growth is slowing (because an economy can’t expand if corporate profits are falling). Presumably the plunging dollar will offer some relief on those fronts. But our relief comes at a high, potentially-catastrophic price for Japan and Europe...
FELS: QE SHOULD FOCUS ON CREDIT AND POTENTIALLY EQUITY BUYING
"We’re condemned to serial bouts of severe volatility having been trained to dismiss real and knowable risks as just improbable black swans.... Central banks can’t keep giving markets everything they want, or the volatility in the end will be catastrophic"