It is not too early to ask how the present US business cycle expansion, already more than five years old, will end. The history of the last great US monetary experiment in “quantitative easing” (QE) from 1934-7 suggests that the end could be violent. Autumn 1937 featured one of the largest New York stock market crashes ever accompanied by the descent of the US economy into the notorious Roosevelt Recession. As we noted previously - it's never different this time...
If you believe that the U.S. economy is heading in the right direction, you really need to read this article. As we look toward the second half of 2014, there are economic red flags all over the place.
On the surface, the economic atmosphere of the U.S. has appeared rather calm and uneventful. Stocks are up, employment isn’t great but jobs aren’t collapsing into the void (at least not openly), and the U.S. dollar seems to be going strong. Peel away the thin veneer, however, and a different financial horror show is revealed. With the Ukraine crisis now escalating to fever pitch, BRIC nations are openly discussing the probability of “de-dollarization” in international summits, and the ultimate dumping of the dollar as the world reserve currency. The U.S. is in desperate need of a benefactor to purchase its ever rising debt and keep the system running. Strangely, a buyer with apparently bottomless pockets has arrived to pick up the slack that the Fed and the BRICS are leaving behind. But, who is this buyer? At first glance, it appears to be the tiny nation of Belgium. Clearly, this is impossible, and someone, somewhere, is using Belgium as a proxy in order to prop up the U.S. But who?
“The stock market is filled with people who know the price of everything, but the value of nothing.” – Philip Fisher.
A 51-point personal perspective on some of the challenges facing today’s investor...
Equity markets are not happy about the Fed's Charles Plosser's economic exuberance ("3% growth no matter the weather" which is 20% above consensus of 2.5%) and his 'good-news-bad-news' monetary policy hawkishness ("may need to raise rates sooner rather than later"). But perhaps the most crucial part of his speech this morning was what the headlines notably left out. Plosser admonished his global central bank brethren: "if central banks do not limit their interventionist strategies and focus on returning to more normal policymaking aimed at promoting price stability and long-term growth, then they will simply encourage the financial markets to ignore fundamentals and to focus instead on the next actions of the central bank." Simply put, he warned, "central bankers have become too sensitive and desirous of managing prices in the financial world.."
Bernanke's legacy: a deceptive case for a failed policy.
Sophistry: the use of fallacious arguments, especially with the intention of deceiving. The Federal Reserve's core policy of quantitative easing (QE) is based on a deceptive but appealing argument voiced by former Fed Chair Ben Bernanke.
On Monday we posted "Goldman Says European QE Will Come In 2015 At The Earliest, If At All" in which we showed for the latest time that Europe's grand delusion that 'QE is coming" (a rumor originated late last year by none other than a French bank) and all of which has already been fully priced into peripheral bonds and local stocks by now, is nothing but yet another massive bluff by the former Goldmanite and current ECB head who has taken lying about the future to a whole new level. Today Reuters confirms as much when it reports that while the ECB may ease modestly (a step which will achieve nothing to unclog the loan creation pathway to private companies), it will not undertake QE at this point.
Overnight Europe got two mini lessons: i) that rumors spread by conflicted French banks about "imminent" ECB QE don't always, if ever, come true, after the ECB spent a decent portion of the overnight session explaining, via Reuters, that while the central bank would engage in "some stimulus for the euro zone economy but falls short of the large-scale effect the ECB could unleash with a major program of quantitative easing (QE) - money printing to buy assets. Such a QE plan is still some way off." Precisely as we warned. The other lesson is that when QE or even hopes of QE fade, bonds get bid due to rotation out of equities into "safe haven" assets. As a result, German Bund yields tumbled with stops taken out (and Goldman stopped out on their Bund short) through the 12 month lows of 1.4% with 10 Year yields following lower and dropping to 2.565% hours ago, or a level not seen since November 1.
Headlines were made earlier today as Ireland’s ten year borrowing costs dropped below the UK’s for the first time in six years. Given that it only recently exited a bailout programme and not long ago was mired in the worst crisis in a generation, this is a pretty astonishing turnaround. Nor is Ireland alone. Spain and Italy can now borrow at similar rates to the USA on ten year debt. More broadly, in the past year peripheral countries borrowing costs have plummeted to levels seen before the crisis, or below, as countries begin exiting bailouts and returning to the markets. There are three key factors driving this 'bubble" and five major problems stemming from this seeming nirvana.
More Reasons QE Is a Dud
“I am often asked why I do not support a more rapid deceleration of our purchases, given my agnosticism about their effectiveness and my concern that they might well be leading to froth in certain segments of the financial markets. The answer is an admission of reality: We juiced the trading and risk markets so extensively that they became somewhat addicted to our accommodation of their needs… you can’t go from Wild Turkey to cold turkey overnight."
The US economy is a house of cards. Every aspect of it is fraudulent, and the illusion of recovery is created with fraudulent statistics. American capitalism itself is an illusion. However, Washington has unique subjects. Americans will take endless abuse and blame some outside government for their predicament – Iraq, Afghanistan, Libya, China, Russia. Such an insouciant and passive people are ideal targets for looting, and their economy, hollowed-out by looting, is a house of cards.
Dispassionate discussion of the near-term forces at work in the foreign exchange market.
Despite popular belief, very few things in our world are exactly what they seem. That which is painted as righteous is often evil. That which is painted as kind is often malicious. That which is painted as simple is often complex. That which is painted as complex often ends up being disturbingly two dimensional. Regardless, if a person is willing to look only at the immediate surface of a thing, he will never understand the content of the thing. This fact is nowhere more evident than in the growing “tensions” between the elites of the West and the elites of the East over the crisis in Ukraine. The centralization of power is best achieved during moments of bewildering calamity. The conjuring of crises is one of the oldest methods of elitist dominance. Not only can they confuse and frighten the masses into malleability, but they can also ride to the public’s rescue as heroes and saviors later on. The Hegelian dialectic is the mainstay of tyrants.
"I got to ask [Bernanke] all these questions that had been on my mind for a very long period of time, right? And then on the other side, it was like sort of frightening because the answers weren’t any better than I thought that they might be." - David Einhorn