We hear, read and listen day in and day out that it’s the Dollar that’s dead, that’s it’s the USA that will be knocked off the top of the roost and come hurtling to the ground with its neck being throttled by 1.364 billion Chinese hoards.
Selling hope, after all, is the stock and trade of the Sell Side. But we all need to take a step back and ask ourselves just where we stand on the proverbial economic timeline...
Just a week ago, Ben Bernanke stumbled when he almost admitted that "forward guidance worked in theory, but not in practice," and while the Fed is sticking to its guns with lower for longer "forward guidance" to replace "as much money as you can eat" quantitative easing; and the ECB promising moar for longer; the Bank of England's Mark Carney just threw them all under the bus by u-turning on his employment-based forward guidance strategy. Having previously established thresholds for his monetray policy guidance, as the FT reports, he has now ditched those plans (as we warned he might "lose his credibility" here) as the British economy is "in a different place" now. And still, we are supposed to trust these bankers to run the world? Perhaps most interesting is the FT changed its title on the story very quickly!
The current Administration has taken on the "war on poverty" as its primary battle ground going into the mid-term elections later this year. As NFIB's Bill Dunkleberg recently noted, "since it is an election year, the main theme will be addressing the disparities in income and wealth (i.e. tax the rich and increase welfare programs) rather than promoting policies that would create jobs and raise incomes in a growing economy. This year, policy will be all about votes." This isn't a new fight. As Robert Rector stated recently - that particular war has been less than successful.
"Fifty years and $20 trillion later, LBJ's goal to help the poor become self-supporting has failed."
However, while the Administration will use the argument to garner votes in an election year, the most interesting aspect about the income inequality debate is that it is the very policies of the current Administration that is fueling the income shift.
All this boils down to one simple question: can the top 10% (roughly 11 million households) support the billions of square feet of retail space that were added in the 2000s? If the answer is no, as it clearly is, then the retail CRE sector is doomed to implode. Let's try a second simple question: what's holding the retail CRE sector up? Answer: leases that will soon expire or be voided by insolvency, bankruptcy, etc. as retailers close stores and shutter their businesses. One last question: who's holding all the immense debt that's piled on top of this soon-to-collapse sector? The domino of retail CRE will not fall in isolation; it will topple the domino of debt next to it, and that will topple the lenders who are bankrupted by the implosion of retail-CRE debt. And once that domino falls, it will take what's left of the nation's illusory financial stability down with it.
It’s Sri Lanka that is the next on the list for investors. The darling of Southeast Asia, the gem of the Indian Ocean is the one of the few that didn’t get dragged down by the downturn in the markets.
After Seven Lean Years, Part 2: US Commercial Real Estate: The Present Position And Future ProspectsSubmitted by Tyler Durden on 01/20/2014 16:32 -0400
The first installment of our series on U.S. real estate by correspondent Mark G. focused on residential real estate. In Part 2, Mark explains why the commercial real estate (CRE) market is set to implode. The fundamentals of demographics, stagnant household income and an overbuilt retail sector eroded by eCommerce support only one conclusion: commercial real estate in the U.S. will implode as retail sales and profits weaken.
The Central Bank rig of the last five years appears to finally be ending.
If the Federal Reserve is trying to force feed us prosperity then the inevitable blowback will be adversity. If the Fed is trying to compel the most dramatic economic recovery in history, then the blowback may well be the deepest depression in history. If the Fed is trying to enforce confidence and optimism then the blowback will be fear and despair. If the Fed is trying to force consumers to spend then the blowback will be a collapse in consumer confidence.
"Sooner or later everyone sits down to a banquet of consequences." - Robert Louis Stevenson
We sincerely hope that we are completely wrong here, that we are missing something, that there is a flaw in our logic. However until we can locate such a flaw we must trust the technical case for treating this Fed force-fed rally in the stock market as something that will end badly.
On the heels of his less-than-optimistic presentation, DoubleLine's Jeff Gundlach tells Europe's Finanz und Wirtschaft "he's concerned about the growing amount of speculation" and draws a parallel between today’s markets and the dot-com boom of the late Nineties. This excellent interview takes the themes of his recent conference call and extends them as he warns "In the over thirty years I’ve been in the financial investment industry, I don’t recall a single year where I saw the year begin with the consensus being so solidified in its thinking across virtually every asset class." His biggest worry (for investors, as opposed to his funds), "the most unthinkable things happen this year and that is a basic pain trade that forces people into treasury bonds."
With the market more bullishly positioned, more euphoric, and more levered than almost any time in history, it is perhaps worth "pondering" what some of the risks to this optimism could be...
Forensic Asia, a Hong-Kong-based reserch firm issued a "sell" recommendation on HSBC on the basis of "questionable assets" on its balance sheet. As The Telegraph reports the analysts involved actually worked at HSBC for 15 years and suggest the ginat bank could have overstated its assets by more than £50bn and ultimately need a capital injection of close to £70bn before the end of this decade. "HSBC has not made the necessary adjustments, during the quantitative easing reprieve...The result has been extreme earnings overstatement, causing HSBC to become one of the largest practitioners of capital forebearance globally... This charade appears to be ending."
"The "common sense" justifications for these dramatic moves are now well documented. The Federal Reserve (Fed) model, which compares earnings yields on the S&P 500 Index (the inverse of price/earnings) with the Treasury yield, clearly signals to load up on stocks. Common sense also tells us that profit margins are at an all-time high, so clearly it's a good time to be buying stocks. Yellen's dovish background, common sense tells us, is yet further reason to expect continued loose monetary policy and accommodation. And, finally, common sense dictates that recent upward gross domestic product (GOP) revisions, lower unemployment numbers, and a successful holiday retail season, means that of course it's time to load up on stocks. Here's the problem: We don't buy the common sense. And so, like the philosopher boy above, we choose to ignore it. We suggest you do the same, but for good reason."
The Status Quo system is failing. Its collapse will be messy. Starting to call things what they really are is a necessary first step to working with this reality.
Fed's Fisher Says "Investors Have Beer Goggles From Liquidity", Joins Goldman In Stock Correction WarningSubmitted by Tyler Durden on 01/14/2014 14:40 -0400
"Continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy," warns the admittedly-hawkish Dallas Fed head. Fisher goes on to confirm Peter Boockvar's "QE puts beer goggles on investors," analogy adding that while he is "not among those who think we are presently in a 'bubble' mode for stocks or bonds; he is reminded of William McChesney Martin comments - the longest-serving Fed chair - "markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations."
The eye of the needle of pulling off a clean exit is narrow; the camel is already too fat. As soon as feasible, we should change tack. We should stop digging. I plan to cast my votes at FOMC meetings accordingly.