New Normal

Continuing with the theme of the secular shift in the labor pool (not cyclical, as the Fed still mistakenly believes: it will take it at least one more year to understand it has been wrong about this aspect of the New Normal economy too, just as it was wrong for decades about the Flow vs Stock debate), it is not only men who are fresh out of luck. As a reminder, we observed earlier that the labor force participation rate for men has just dropped to an all time low. It turns out there is another class of workers whose participation rate is at the lowest in series history: that of "25 year olds with a Bachelor's degree and higher", i.e. college grads. At 75.5%, it is the lowest since this data has been kept by the BLS. But not all is abysmal in America's labor force. While the share of workers with a college degree has plunged to all time lows, a bright spot can be found when observing the labor force participation rate of those who never bothered with college, and for whom high school was their last known degree-granting institution. At 59.9%, the participation rate is well of its 2012 lows of 59.0% and steadily rising, in fact, to borrow a term from the housing bulls, it may well have "bottomed". Now there is some truly great news for the future of America's highly educated workforce.

There was a time when the NSA would not know the content of this sentence minutes (or depending on the speed of typing, hours) ahead of our general readership. Those days are now gone, primarily thanks to the Patriot Act, which however merely accelerated the inevitable Orwellian destination to which American society was otherwise headed and which made constant "supervision" and "vigilance" of every US citizen a necessity (for some eyewatering details read “We Are This Far From A Turnkey Totalitarian State" - Big Brother Goes Live September 2013). There was, however, one aspect of society over which the US government did not have Chinese-type "firewall" supreme authority: the Internet. Now, as a result of an Executive Order being quietly drafted, the president of this once great country, together with the Department of Homeland Security formed in response to the events of September 11, is about to grasp supreme control over this last bastion of New Normal expression and content dissemination, naturally under the guise of protecting the people. Because as Bloomberg reports, President Obama’s administration is drafting an executive order that would create a program protecting vital computer networks from cyber attacks.

A few months ago when the new French socialist president gave details of his particular version of the "fairness doctrine" and said he would tax millionaires at 75%, we said that "we are rotating our secular long thesis away from Belgian caterers and into tax offshoring advisors, now that nobody in the 1% will pay any taxes ever again." While there was an element of hyperbole in the above statement, the implication was clear: France's richest will actively seek tax havens which don't seek to extract three quarters of their earnings, in the process depriving France (and other countries who adopt comparable surtaxes on the rich) of critical tax revenues. It took three months for this to be confirmed, and with a bang at that. The WSJ reports that Bernard Arnault, the CEO of LVMH, and the richest man in France, has decided to forego hollow Buffetian rhetoric that paying extra tax is one's sworn duty, and has sought Belgian citizenship.

Curious why legendary hedge fund managers are shutting down shops left and right in disgust with the mockery that central planning and algorithmic short-termism had made of equity markets? Don't be: his name is Julian Marchese, he runs a "macro fund"... and he is 16. Don't get us wrong: we enjoy the next youth trading prodigy, and here the Schwab baby comes to mind, as much as everyone else. Our concern is when it is the people who have never even seen half of a business cycle that start running your money, and, probably worse, making money, which leads them to believe they know what they are doing, and gets gullible LPs to allocate capital to them based on a 3 month track record, when in reality the entire market is one merely primed for outperformance courtesy of central planner puts and priced to Bernie Madoff ponzi perfection, targeting a specific investor type. And here the Schwab baby comes to mind again.

Central Banks United have the upper hand these days. So don’t mess with them…

At least not this week…

Over the past several months (and years) we have been warning that the ongoing collapse in trading volumes, in part due to the lack of faith in capital markets that now have all the integrity of a rigged Vegas casino from the 1960s, in part due to investors' need to monetize assets in a world in which wages simply refuse to keep up with prices, will have not only irreversible implications on the shape of market structure, but also substantial consequences when it comes to the layout of modern banks, and associated up and downstream variables, such a jobs, real estate, support professions, municipal taxes and much more. Nowhere is this more evident (for now at least) than in the massive corporate reorganization taking place at Nomura's American division, which among many other things is about to lose its brand new $270 million trading floor even before a single trader set foot in it.

The dividend theme has hardly run its course. As David Rosenberg of Gluskin Sheff illustrates in his latest note, the income-starved retiring boomers are being forced to garner income more and more via the equity market where dividends are up more than 8% over the past year. Because of ultra-low interest rates, interest income growth has vanished completely. And here is the great anomaly. Back in the early 1980s, investors bought equities for capital appreciation and they purchased Treasury securities for yield. Today it is the complete opposite.

The chart below by way of Grant Thornton shows something rather disturbing: in recent months, the number of IPOs that are trading "at or above their issue price 30 days after IPO pricing" has been collapsing in virtually a straight line since the early 1990s, and in 2012 was just shy of all time lows (which have been recorded during periods of great market crashes, not when the S&P is about to hit its yearly highs). As such the lack of success of such prominent recent names as FaceBook, Zynga, Groupon and many others, is not simply a function of valuation and investor sentiment, but related to the ongoing deteriorating in the underlying market structure for a variety of reason, many of which have been written about here in the past.

There is one major problem, for the administration at least, when it comes to presenting labor data that is not "compiled" by the Bureau of beLabored Statistics and its Bank of Spain-endorsed Arima-X-13 seasonal data fudging program: it reflects realty, not statistical or seasonal adjustments, and certainly can not be skewed this way or that depending on what best suits the incumbent presidential candidate two months ahead of the election. Which is why one won't read anywhere that one of the most reliable indicators when it comes to real time hiring data as reported by the actual job market and not by some conflicted, data challenged organization which on top of everything has data leak issues, namely Help Wanted ads just plunged by the most since the Lehman collapse.

Having operatied for years under ZIRP, and with the NIRP neutron bomb just around the corner, and already implemented in various European countries, one question remains: can banks be banks, i.e., can they make money, in a world in which borrowing short and lending long, no longer works, courtesy of ubiquitous and pervasive central planning which is now engaged solely and almost exclusively (the other central bank ventures being of course to keep FX rates and equities within an acceptable range) on the shape of the yield curve. Since 2009 our answer has been a resounding no. Today, Bill Gross speaks up as well, and his answer is even more distrubing: "If the dancing has slowed down, then the reason is not just an overweight partner. It’s that the price of money (be it in the form of a real interest rate, a quality risk spread, or both) is too low. Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it. When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over." Indeed, according to Gross central banks have now clearly sown the seeds of the entire financial system's own destruction. That he is right we have no doubt. The only question: how soon until he is proven right.

While we have long realized that under the 'New Normal' reality is widely in the eye of the beholder, especially if that beholder is an employee of some central planning authority, where good is good, bad is better, where "if things are serious, than you have to lie", and the result is that every 'fact' is both a wave and a particle at the same time regardless if observed with the wave-particle duality never collapsing (thus making a mockery of Schordinger's principles) little did we know that it also refers to the physical age of former 'prenup free' wives of one time hedge fund moguls, and now merely drugged, drunk drivers of (appropriately enough) GPS-impaired vehicles, which it appears can have a variance of 7 years in the span of 2 years... Read on.

While the Clint Eastwood clip was a solid 8 out of 10 on the weirdness chart, it took the man who, as everyone knows, scares all charts away, and who singlehandedly burst the dot-com bubble, to put things in perspective to the evangelical crowd. Because, while Waldo may be hiding from Norris, Norris will no longer hide from what he terms "socialism or something much worse."

In two days Mario Draghi may, although without Germany's blessing most likely will not, announce vague terms of how the ECB plans on monetizing hundreds of billions in short-term (sub-3 Year) bonds by Spain and Italy, which according to the ECB is not really monetization, and the only thing that is needed is for the two countries to admit they are insolvent, something which paradoxically will never happen as long as the ECB does everything in its power to spook markets away from fair clearing levels, and to keep the cashflow implied price at record divergence from the centrally-planned "valuation" determination. But let's assume Draghi does go ahead and one up Bernanke, announcing the next easing round a week ahead of the September FOMC meeting, as both central banks take the lunge into the latest lap of currency devaluation. What happens then? Well, as JPM's Michael Cembalest puts it quite succinctly, Draghi will unleash nothing short of the transformation of the ECB from the European Central Bank to the European Creosote Bank (see below for the reason). Numerically, this will mean that once the ECB is done monetizing another €1 trillion or so in bonds in the next year, the ECB will then hold just shy of a unimaginable 50% of the entire Eurozone GDP, taking the New Normal monetary world well beyond the rabbit hole and deep inside the twilight zone.

With the US closed today, the rest of the world is enjoying a moderate rise in risk for the same old irrational reason we have all grown to loathe in the New Normal: expectations of more easing, or "bad news if great news", this time from China, which over the weekend reported the first official sub-50 PMI print declining from the magical 50.1 to 49.2, as now even the official RAND() Chinese data has joined the HSBC PMI indicator in the contraction space for the first time since November. Sadly, following today's manufacturing PMI update, we find that the rest of the world is not doing any better, and in fact of the 22 countries we track, 80% are now in contraction territory. True, Europe did experience a modest bounce from multi-month lows of 44 in July to 45.1 in August (below expectations of 45.3), but this is merely a dead cat bounce, not the first, and certainly not the last, just like the US housing, and now that China is officially in the red, expect the next shoe to drop in Europe. Also expect global GDP to eventually succumb to the manufacturing challenges faced by virtually every country in the world, and to post a negative print in the coming months.

Just what does all this easily accessible and now pervasive student debt fund? The chart below, courtesy of Bloomberg, provides the answer: in the past 3 decades there has been no other cost that comes even remotely close to matching the near hyperinflationary surge in college tuition and costs.