Rate of Change
This is it! The holy grail of forecasting, Jeffrey Kleintop has discovered it. You'll never have to worry about actual earnings reports, a massive bubble in junk debt, the sluggishness of the economy, new record levels in sentiment measures and margin debt, record low mutual fund cash reserves, the pace of money supply growth, or anything else again. Just watch the yield curve! Unfortunately, as we showed here in the US, this advice could turn out to be extremely dangerous for one's financial health - and has been across many nations throughout time. People remain desperate for excuses as to why the latest bit of asset boom insanity will never end
With the market firmly under the control of the Fed, VIX plunging and the S&P at all time highs is the a different indicator to look at for "fear"? For one possible answer we refer to the latest note by FBN's JC O'Hara who looks at a different "fear" index, namely the Credit Suisse Fear Barometer. He finds that, at 37%, it has never been higher.
Anyone reading the regular Federal Open Market Committee press releases can easily envision Chairman Yellen and the Federal Reserve team at the economic controls, carefully adjusting the economy’s price level and employment numbers. The dashboard of macroeconomic data is vigilantly monitored while the monetary switches, accelerators, and other devices are constantly tweaked, all in order to “foster maximum employment and price stability." The Federal Reserve believes increasing the money supply spurs economic growth, and that such growth, if too strong, will in turn cause price inflation. But if the monetary expansion slows, economic growth may stall and unemployment will rise. So the dilemma can only be solved with a constant iterative process: monetary growth is continuously adjusted until a delicate balance exists between price inflation and unemployment. This faulty reasoning finds its empirical justification in the Phillips curve. Like many Keynesian artifacts, its legacy governs policy long after it has been rendered defunct.
It was interesting this week to watch the media explode in a frenzy of reporting over the "stronger than expected" auto sales. The increase in auto sales to 16.9 million units was certainly a welcome number. However, was it really the "long awaited" sign of economic recovery that it was portrayed to be?
Draghi Reveals More: Will Do Targeted LTRO, Suspends Sterilization, Prepares ABS Purchases; No QE RevealedSubmitted by Tyler Durden on 06/05/2014 08:39 -0400
The much anticipated additional measures have been revealed:
- DRAGHI UNVEILS PACKAGE OF TARGETED LTROS, WORK TO PREPARE QE
- DRAGHI SAYS INITIAL SIZE OF TARGETED LTRO PLAN IS 400BLN EUROS
- ECB EXTENDS FIXED RATE FULL ALLOTMENT, SUSPENDS SMP STERILIZING
- DRAGHI SAYS PACKAGE INCLUDES PREPARATIONS FOR ABS PURCHASES
In other words, even more actions along what was expected: keep in mind the last time the ECB did €1 trillion in LTROs it did exactly nothing to boost inflation or the "real economy." Furthermore, the ABS purchases aren't activated: just being "prepared." However, what was not revealed was the biggest wildcard: European QE, which as we said repeatedly, won't happen until Europe's deflation is far worse, if ever.
With the economy now more than 5 years into an expansion, which is long by historical standards, the question for you to answer by looking at the charts below is: "Are we closer to an economic recession or a continued expansion?" How you answer that question should have a significant impact on your investment outlook as financial markets tend to lose roughly 30% on average during recessionary periods. However, with margin debt at record levels, earnings deteriorating and junk bond yields near all-time lows, this is hardly a normal market environment within which we are currently invested. Therefore, we present a series of charts which view the overall economy from the same perspective utilizing an annualized rate of change. For the Federal Reserve, these charts make the case that continued monetary interventions are not healing the economy, but rather just keeping it afloat by dragging forward future consumption. The problem is that it leaves a void in the future that must be continually filled.
On the 'growth' side, Commercial and Industrial loans are rising at a double digit annual rate of change (although it is unclear whether this is an indication of business optimism or stress - after all, we did see a big jump in these loans leading into the last recession). On the flip side, the bond market and the US dollar index seem to be flashing some warning signs about future growth. Simply put, the outlook for the economy is decidedly uncertain right now and we think so is the confidence in Janet Yellen. We think the more dire outcome for stocks would be if Toto fully pulled back the curtain on monetary policy and revealed it to be nothing more than a bunch clueless economists sitting in a conference room with no ability to control the economy or the markets. If US growth disappoints after all the Fed has done, how could anyone continue to view the Fed wizards as omnipotent? That would send the stock market back over the rainbow to the reality of an economy with big structural problems that can only be solved through political negotiation, something that has been notable only by its absence over – at least – the last 6 years. Are we headed back to Kansas?
Why Mainstream Economists Like Krugman Are So WRONG and So DANGEROUS
The Zagat-style summary, the market is "extremely overvalued", but it will rise on an "increase in the level of profits" and "we expect an 8% rise in the level of earnings this year", even though "we expect many firms will issue negative earnings guidance ahead of 1Q 2014 reporting season that takes place from mid-April to mid-May."
Does anything about 2014 remind you of 2008? The long lists of visible stress in the global financial system and the almost laughably hollow assurances that there are no bubbles, everything is under control, etc. etc. etc. certainly remind me of the late-2007-early 2008 period when the subprime mortgage meltdown was already visible and officialdom from Federal Reserve chairman Alan Greenspan on down were mounting the bully pulpit at every opportunity to declare that there was no bubble in housing and the system was easily able to handle little things like defaulting mortgages. The party, once again, is clearly ending and raises the question: "If asset bubbles no longer boost full-time employment or incomes across the board, what is the broad-based, “social good” justification for inflating them?"
Big Bubble Brutally Bursts ... Bringing Bankruptcies, Bond Busts
The 'cash on the sidelines' myth has more lives than a cat. No matter how often the logical fallacy underlying it is pointed out, Wall Street continues to propagate it. Nevertheless, money and credit are of course extremely important factors in the analysis of asset markets. The below provides what are hopefully a few useful pointers as to which data one should keep an eye on in this context.
There is no point in trying to avert or prevent bubbles caused by monetary pumping by regulatory means. If one avenue for bubble formation is cut off, the newly created money will simply flow into another area. In fact, new bubbles almost always become concentrated in new sectors. If there were a genuine desire to keep the formation of bubbles in check, adopting sound money would be a sine qua non precondition. However, no-one who has any say in today's system has a desire to adopt sound money and give up on the failed centrally planned monetary system in favor of a genuine free market system. Our guess is that the booms and busts the current system inevitably produces will simply continue to grow larger and larger until there comes a denouement that can no longer be 'fixed'.
The Fed tightens by a little (sorry, tapering - flow - is and always will be tightening): markets soar; Turkey tightens by a lot: markets soar. If only it was that easy everyone would tighten. Only it never is. Which is why as we just reported, the initial euphoria in Turkey is long gone and the Turkish Lira is basically at pre-announcement levels, only now the government has a furious, and loan-challenged population to deal with, not to mention an economy which has just ground to a halt. Anyway, good luck - other EMs already faded, including the ZAR which many are speculating could be the next Turkey, and certainly the USDJPY which sent futures soaring last night, only to fade all gains as well and bring equities down with it.
The President will do his best to put a positive spin on the current economic environment and the success of his policies to date when he gives his speech tonight. However, how you define the current environment may have much to do with where you fall in current income distribution. This was a point made by Mr. Boyer: "In 2012, the richest 10 percent of Americans earned their largest share of income since 1917, said Emmanuel Saez, an economist at the University of California at Berkeley. Meanwhile, Census Bureau statistics showed that real average income among the poorest 20 percent of families continued to fall each year from 2009 to 2011." As with all things - it is the lens from which you view the world that defines what you see. In the end, it will be whether we choose to "see" the issues that currently weigh on economic prosperity and take action, or continue to look the other way. History is replete with examples of the demise of empires that have done the latter.